Erin Steinbruegge, the chief operating officer of OneSpace, an online platform that connects businesses and freelancers, just helped guide the company through a successful capital raise, which resulted in $9 million in funding for the company. OneSpace maintains a network of 500,000 freelancers and independent professionals worldwide, and helps to connect them with employers who need access to on-demand talent. Steinbruegge offered advice for other entrepreneurs looking to raise capital when she spoke with Business News Daily about OneSpace’s successful experience. Here’s what she had to say.
Business News Daily: Tell us a bit about OneSpace and what the company does.
Erin Steinbruegge: OneSpace is a virtual workspace platform that brings companies in need of flexible, scalable talent together with freelancers seeking assignments that match their skillsets. Founded in 2012, we have grown to include more than 500,000 freelancers and completed more than 120 million projects. The platform offers everything needed for companies and freelancers to succeed in the modern-day workplace, from talent on demand, performance management tools, security benefits, payment options to online dashboards. With more individuals wanting workplace flexibility and companies needing access to global talent on demand, OneSpace is the perfect bridge to connect the gap.
With the completion of our Series B funding of $9 million, we plan to launch our new “software as a service” later this year. This new software will give companies the freedom of self-servicing our current software, but we will also continue to offer our managed services for companies that seek external experts. Our central mission is to create a best-in-class platform for accessing and managing cloud-based talent.
BND: Describe the process of going out for funding. What did it entail? How did you raise your money?
Steinbruegge: The process of funding can be one of the most challenging and rewarding experiences in your career. Anyone considering a capital raise should be prepared to invest a significant amount of time (pulling you away from your core business) and physical and emotional energy into the process. However, the rewards can be great, beyond the funding of your business. Throughout the process you can expect to further clarify your business pitch and competitive advantages, develop personal strength that comes from having people challenge your ideas, and develop a network of advisors who can help you throughout your journey.
Regardless of the outcome, as an entrepreneur you ultimately should pride yourself in mustering the courage to participate in the pitch and in knowing you had a business idea worthy of VC interest.
BND: What are your tips to other entrepreneurs who are looking for funding?
Steinbruegge: Pitch early and often before you hit the road. Pitch to your team, friends, family, business partners, and anyone who will challenge you and provide valuable, candid feedback. Expect to refine your story multiple times.
Use relationships to get introductions. You have a much better rate of success landing a pitch meeting if you have a warm referral.
Know your audience going into the pitch. Do your homework on the partners and the firm and their portfolio beforehand. Cater your discussion to that firm and the partners you are meeting with.
Focus on the team. There is a lot to cover over a short period of time in a pitch, but keep in mind that [venture capitalists] are ultimately betting on the market opportunity and your team’s ability to capture it. Make sure you highlight the team’s leadership capabilities.
While the ability of small businesses to obtain capital has improved in recent years, getting a traditional bank loan is still a tough obstacle, a new study finds.
Research from Pepperdine University’s Graziadio School of Business and Management and Dun & Bradstreet revealed that over the last four years, there has been a 13 percent increase in access to capital for small businesses. However, most are getting that money from personal assets and not banks or online lenders.
The study revealed that only 38 percent of small business respondents qualified for a bank loan within the last three months, compared with 70 percent of mid-size businesses. While that’s up from 30 percent in the first quarter of the year, it is down from a four-year high of 46 percent in the third quarter of 2014.
When it comes to alternative lenders, small businesses had the most success with merchant cash advances. The research found that 41 percent of the small businesses surveyed were able to obtain a merchant cash advance, compared with just 20 percent who were able to get a regular loan from an alternative lender.
Most small business owners are relying on their own personal assets to help fund their business. Specifically, more than 70 percent of those surveyed used personal savings, 45 percent used personal credit cards and 19 percent used cash from the sale of personal assets.
Crowdfunding is growing increasingly popular with small businesses. The research found that 19 percent of small businesses that sought financing in the past three months used crowdfunding as a funding source, compared with just 7 percent of mid-size businesses.
Jeff Stibel, vice chairman of Dun & Bradstreet, said when they began conducting these studies four years ago, small businesses were reeling from the effects of the Great Recession.
“Since then, we have seen steady progress for small businesses being able to acquire the capital they need, although the financing is still predominantly not coming through traditional lenders,” Stibel said in a statement. “It will be interesting to see how the new option of crowdfunding will affect small businesses, as our study has shown more eagerness to use that option as compared to their mid-sized counterparts.”
Although access to capital improved over the past three months, the number of small businesses needing it declined. Overall, demand for capital from small businesses dropped from 38 percent in the first quarter of the year, to 32 percent in the second quarter.
Of those the small businesses that didn’t try to access capital over the past three months, 49 percent said it was because they had enough cash flow in place, while 24 percent indicated they already had sufficient financing. However, 16 percent didn’t apply for financing because they were worried they would be rejected, 12 percent shied away because of the weak economy and 7 percent said they were holding out for cheaper financing rates.
“Business borrowing habits suggest owners may not see a need for an immediate infusion of capital,” said Craig Everett, an assistant professor of finance and director of the Pepperdine Private Capital Markets Project. “However, these findings suggest business owners are still feeling the lasting impact of the recent recession and remain skittish about the future, as reflected in an abundance of caution when it comes to the economic environment.”
The narratives that influence our economy have a great deal of momentum. Giant, irreversible, tectonic shifts are transforming the landscape: urbanization, globalization, information technology, the decline of print media, mobile technology, workers losing ground against companies. The momentum behind them seems so vast and powerful that a change of course is unlikely.
But fatalism isn’t a substitute for analysis. And even the biggest and most-enduring trends can reverse, or get, um, disrupted. And we may be finally seeing that when it comes to corporate profits and wages.
The salient feature of the U.S. expansion, which began in July 2009, was that the fruits of growth have been unevenly distributed between capital and labor, between companies and employees. After the financial crisis, companies moved swiftly and relentlessly to reduce labor costs, find new markets, and improve productivity. And so profits bounced back impressively.
On an economy-wide basis, after-tax corporate profits grew from an annualized rate of US$671 billion in the third quarter of 2008 to $1.77 trillion in the fourth quarter of 2014. (The data can be seen here.) That’s significant, especially when you consider that corporate profits more than doubled in six years as the economy grew slowly.
Profits rose in part because companies were both effective and ruthless when it came to holding down labor costs. Thanks to a host of big, long-standing trends — the decline of labor unions, slack in the labor markets, the threat of outsourcing — a smaller percentage of company revenues was paid out as wages, leaving a larger share as profits. And so after-tax corporate profits rose from about 4.6 percent of gross domestic product in the third quarter of 2008 to about 10 percent of GDP in 2014. (The data can be seen here.) In many quarters during this expansion, that proportion has reached record highs. Meanwhile, median income in the U.S. in 2014 was below its 2008 level.
This trend — higher corporate profits and lower worker income — too, seemed unstoppable. Until recently. And that’s because political, social, and economic factors are now beginning to exert force in the opposite direction.
Unions certainly have not seen any significant resurgence. (Only 6.7 percent of private-sector workers are unionized, according to the Bureau of Labor Statistics.) But workers have benefited from other forms of pressure on employers. Although the federal minimum wage hasn’t budged since 2009, several large states and cities have passed laws in the last few years that have mandated higher hourly pay. Many large companies, including Aetna and Walmart, sensing the social and political pressure for higher wages, have imposed higher minimum wages themselves.
At the same time, there has been a slow-building but significant shift in the labor market. The U.S. economy is now in the midst of its longest stretch of job growth in modern economic history. It has added payroll jobs for 71 straight months, and has added nearly 15 million jobs since February 2010. Meanwhile, companies say they want to hire many more workers. As we’ve noted, the number of job openings in the U.S. has soared; at the end of July, there were more than 5.6 million vacant positions to be filled.
That means it has become a real challenge for companies to retain existing workers and hire new ones — employers today have to offer people higher salaries to walk across the field, or to come off the sidelines. And if they have to boost pay to fill open positions, they may find themselves having to increase pay for the people who already work there. To a large degree, the laws of supply and demand, which worked in companies’ favor between 2009 and 2014, is now working against them.
Obtaining financing is one of the biggest hurdles most entrepreneurs will have to overcome. If a bank loan won’t cover what you need and you don’t have any connections to investors, it can be tough to know where to begin. Online crowdfunding — raising smaller amounts of money from multiple backers — has become an increasingly common solution to this dilemma because it allows startups to reach out to a large number of potential investors at once.
Although Kickstarter and Indiegogo are two of the most popular crowdfunding platforms, success there isn’t always guaranteed: For every project that meets its goal, there are dozens that just didn’t pick up enough steam to get funded. So, where else can you turn?
Whether you’re looking for a small investment to jump-start your company or a large round of capital to grow it to the next stage, here are 10 sites that can help you raise the money you need.
This site brands itself as a platform for startups to be matched with potential investors. AngelListhas a network of investors called syndicates, who cover all setup costs and carried interest so that startups pay nothing to raise funds. Any startup incorporated in the United States or the United Kingdom can apply for funding by creating an AngelList profile, but syndicates typically look for companies with a credible founding team, demonstrable postlaunch traction or a reputable offline investor already involved with the company.
CircleUp operates under the belief that entrepreneurs should be able to raise money based on their business’s merit, not on who they know. This site offers consumer product and retail startups access to a community of high-quality investors who can help them raise funds ranging from $100,000 to upward of $10 million. Though CircleUp typically requires crowdfunding companies to have around $500,000 minimum in revenue, it will consider exceptional earlier-stage companies for its Seeds program. There are no listing or introduction fees, and you are charged only when you achieve your fundraising goal.
Crowdfunder is an equity crowdfunding platform that makes it easy for businesses to raise capital from its network of accredited investors. The site allows startups to raise money through equity, debt, convertible notes or revenue share, and to choose if their deal is private or public. Instead of taking a percentage of the funds raised, Crowdfunder sets a flat monthly fee (starting at $299) for entrepreneurs to use its capital.
Startups interested in equity investors can sign up for EquityNet, a business crowdfunding platform that allows entrepreneurs to share their profiles and business plans with a network of more than 20,000 angel investors, venture capitalists and business supporters. EquityNet’s patented business plan and analysis software help you optimize your planning and reach the investors who would be most interested in your project.
Created by a team of startup founders who understand the challenges of raising capital, Fundable allows entrepreneurs to raise money from investors, customers and friends. Companies seeking funds can create a profile on the site, set their goals and rewards, and promote their campaign. Fundable offers companies the opportunity to provide reward-based fundraising and equity fundraising. Reward fundraising allows companies to offer rewards from companies seeking less than $50,000 and allows investors to donate any amount. Equity fundraising, on the other hand, is for companies looking to raise a larger amount of money, and requires a minimum commitment of $1,000 from backers.
Funding is one of the biggest challenges most entrepreneurs face. Whether they take out loans, crowdfund or accept investments, startup founders often find that they need some kind of outside financing to make their business dreams a reality.
But some entrepreneurs choose to self-fund their operations, investing their own money into the business. This is known as bootstrapping, and if you have the resources to do it, you will benefit from complete financial and creative control over your business. There are no equity stakeholders demanding that you move in a certain direction, or lenders looking for their loan payments each month.
The downside, of course, is that your business budget is dictated by your own personal finances. Bootstrappers are on the hook for every last cent invested in the business, and without the right financial-management skills, you could end up driving yourself into serious debt.
Any financing path comes with pros and cons, and bootstrapping is no exception. It’s true that this method will put severe constraints on your budget and increase your personal liability, but there are also plenty of advantages to self-funding. Our expert sources weighed in on why bootstrapping might be a good idea for you:
“Bootstrapping allows an entrepreneur to have complete control over your business without sharing ownership with outside investors. You can manage the pace and iterations of your product, marketing and sales efforts, whereas outside investors may push you to pursue revenue before your product is ready to go to market.” – Bob Johnston, CEO of SponsorHub, a sports and entertainment analytics company
“A bootstrapping founder can prove value without having to give up equityfor expensive money. You give yourself the shot of actually driving revenues and greatly increasing your valuation before funding, and maybe never taking money, which would be the best thing a business can do.” – Andrew Heckler, CEO of content marketing and native advertising tech companyHone
“You don’t need anyone’s approval (except yours and your partners’) to spend your money in support of a certain direction or initiative. You’re not subject to the whims and influences of investors who pop in and out of your business without the day-to-day knowledge you’ve got as the leader. You’ve got the freedom to add people to your team as the cash flow can support it, which means you don’t over-hire and then have to let people go.” – Bryan Miles, CEO and co-founder of business process outsourcing company Miles Advisory Group
“Bootstrapping allows you to focus on the essentials. Having a massive sum of money and investors demanding that it be spent can lead to waste. When bootstrapping, you learn to be more analytical in terms of what you spend money on. Learning this skill is crucial to any entrepreneur.” – Endri Tolka, co-founder and COO of YouVisit, a company that provides virtual tours and virtual-reality solutions
“Bootstrapping forces creativity. It drives you to work efficiently and intelligently in order to maximize profits and fund future growth, and to manage that growth carefully.” – Mark Buff, CEO and founder ofHDTV antenna maker Mohu
There are a lot of different ways to finance a startup. You could save up your own money and bootstrap the business. You could borrow money from family and friends. You could even invest some funds from your 401(k) account. But for many businesses, the choice comes down to taking out a loan or raising investor capital.
The financial path you choose will affect how you run your business in some way, so you should not make this decision lightly. Borrowing and fundraising both have their pros and cons, and the best option for you depends heavily on the type of business you run and what you need the money for.
Finance and business experts shared the advantages and disadvantages of loans versus fundraising, and weighed in how to make the right choice for your business.
A loan is one of the most cost-effective ways to fund your business, said Jay DesMarteau, head of small business banking at TD Bank. If you obtain your loan through a bank or SBA (Small Business Administration) lender, you’ll usually have a lower interest rate than on a personal loan. You may even enjoy some tax benefits. Taking out a loan also gives you the opportunity to build up your business’s credit score as you repay the loan.
DesMarteau noted that the biggest advantage of a loan is retaining full ownership of your company, which won’t happen if you take on investors (more information on that below).
If you’re looking to get a traditional bank or SBA loan, the application process is very lengthy, said Jay Chang, co-founder of the personal growth and leadership resource, Achieve Iconic. You’ll also need to satisfy a long list of prerequisites, which often includes being an established business, rather than a new venture. Chang noted that loans also mean you risk losing collateral if you can’t pay off the loan.
Although alternative lenders often have much quicker approval and funding processes, they also typically charge high interest rates for that convenience. Evan Singer, general manager of SBA loan provider SmartBiz, warned business owners that while “fast financing” offers may help in a pinch, they may not be a good longer-term strategy due to the higher rates.
In some cases, both traditional and alternative lenders will put restrictions on what you can use your loan for.
While success or failure in crowdfunding campaigns hinges on a variety of factors, the most important aspect is the level of confidence backers have about the campaign’s outcome, according to a study by the University of Michigan, University of Toronto and Google.
“Pledging is not costless, and hence consumers would prefer not to pledge if they think the campaign will not succeed,” the study’s authors wrote. “This can lead to cascades where a campaign fails to raise the required amount even though there are enough consumers who want the product.”
When deciding whether to back an entrepreneur’s crowdfunding campaign, backers examine multiple factors, including the price of the product, how much has been raised, the funding target and how long the campaign lasts.
“The absence of early pledges makes those who arrive later pessimistic about the chances of campaign success, and therefore discourages them from pledging,” Mohamed Mostagir, one of the study’s authors and an assistant professor at the University of Michigan, said in a statement. “This can create a vicious cycle where even good products can fail.”
The opposite can hold true as well, according to Mostagir. He said early funding on a campaign can create a cascading effect that propels a campaign well past its funding goal. [See Related Story: Crowdfunding Entrepreneurs Should Sell Themselves First]
Based on their research, the study’s authors suggest that entrepreneurs consider a lower funding target in order to reduce the uncertainty in a backer’s mind about the chances of a campaign’s success.
They use the Coolest Cooler campaign on Kickstarter as an example. The campaign was first launched in 2013 with a funding goal of $125,000. At the time, it never reached its target.
However, when the campaign was relaunched several months later with a funding goal of only $50,000 it was wildly successful. The second campaign raised more than $13 million, making it the largest funded project in Kickstarter history at the time.
The study’s authors admit, however, that there are some risks to this type of approach.
“Of course, the downside to the strategy of shading the real target is that it is possible that the campaign ends up raising enough money to cover the artificial target — and hence ‘succeed’ — but not the actual one,” the study’s authors wrote. “This leaves the seller with a commitment to deliver a product that it does not have enough means of producing.”
In addition to considering a lower funding goal, it is also important to make sure backers can see in real time how much a campaign has raised, according to the research. The study’s authors said that if the backers can always see the current funding level, they may be more inclined to start pledging when they see that a campaign is doing well.
“Conversely, if the campaign is off to a slow start, then maybe that will put off potential consumers from pledging,” the study’s authors wrote. “Not revealing the pledge amount, while it may circumvent the later scenario to a certain extent, also brings about uncertainty and ambiguity about how the campaign is going, and as a result may end up delivering undesirable outcomes as well.”
The study was co-authored by Saeed Alaei of Google and Azarakhsh Malekian of the University of Toronto.
Co-founders of the technology startup Keen Home, Nayeem Hussain and Ryan Fant are coming fresh off of a highly successful round of equity crowdfunding. Using the JOBS Act’s Title IV Regulation A+ rules, known colloquially as a “Testing the Waters” campaign, Hussain and Fant partnered with the crowdfunding platform SeedInvest. The duo ended up bringing in $4 million in capital in just five days. Since the JOBS Act is fairly new and equity crowdfunding is largely uncharted territory, Business News Daily sat down with Hussain to discuss Keen Home’s success and how the company navigated the process. Here is his advice for turning an equity crowdfunding campaign into real capital.
Business News Daily: Please briefly tell me about your company.
Nayeem Hussain: Keen Home develops hardware and software products to enhance a home’s infrastructure. We wake up sleepy devices and systems with innovative, full-stack technologies to provide homeowners with increased comfort, improved efficiency and a better-maintained home.
Keen Home’s software platform offers partners data for lead generation, actuarial insight for risk pricing, and [tools for] peak load management.
Our first product, the Smart Vent, was launched in November 2015 and has grossed $2M in sales on over 30,000 units sold.
BND: What is it like preparing for equity crowdfunding for Title IV, and what should other entrepreneurs be aware of when considering doing so?
Hussain: I would very much liken the process to prepping for a product-crowdfunding campaign (i.e., Kickstarter or Indiegogo). We subscribe to a three-phase system for promoting such a campaign.
The first phase involves activating your existing community of supporters (these are customers, subscribers to your newsletter, and friends or family).
The second phase involves running digital ads, soliciting press coverage, and asking prominent investors and advisors to spread the word and offer endorsements. This second wave is designed to increase awareness and credibility at the same time.
Finally, the third phase involves entire marketing campaigns, targeted emails and initiatives that will yield the broadest possible exposure. Ideally, the campaign will already have picked up steam prior to phase three, such that press coverage is easier to secure.
BND: What advantages did you see to using Title IV as opposed to more conventional methods of selling equity?
Hussain: Ryan, Will and I founded Keen Home three years ago to help homeowners live more comfortable and energy-efficient lives. We have long been firm believers that great solutions come out of great ideas and the coalescence of feedback from the community a product is built for. It makes sense that the same community should have the opportunity to own a piece of the company that is building those solutions.
Mostly, professional investors are financially motivated — oftentimes, this motivation can hamper long-term value creation. If we were to execute a Title IV raise, then we would not be as beholden to professional investors when determining the future direction for Keen Home.
BND: Were there any particular difficulties in either complying with the law or getting the word out about your equity crowdfunding campaign? What methods were most successful, and what would you recommend to other small business owners?
Hussain: We are working with SeedInvest to execute and manage our Title IV Testing the Waters campaign. SeedInvest has provided expert legal advice as well as a reputable platform to host our company page. I highly recommend [that] other small business owners work with a platform like SeedInvest to manage the legal intricacies and also enhance credibility for would-be investors.
BND: Were you surprised at the scale of your success? What do you think the most important factors of your campaign were that helped you raise so much money?
Hussain: We tempered our expectations with the fact that equity crowdfunding under the JOBS Act is very new, with very few companies achieving meaningful success. Keen Home is one of the first connected-device companies seeking to raise money in this fashion. These factors made it difficult to predict how our Testing the Waters campaign would perform.
Thankfully, the response from our community has been extraordinary. Further, since Keen Home is the first company [from the television show] Shark Tank to Test the Waters under Title IV, we have been able to generate buzz amongst the community of viewers that see an opportunity to invest alongside [Shark Tank investor] Robert Herjavec, an investor they admire.
The key to our early success in this Testing the Waters campaign has been the ability to garner the support of our community members. Long before this campaign was conceived, our head of community, Nate Padgett, was hard at work cultivating a loyal group of evangelists and brand supporters. Our supporters appreciate the authenticity, ingenuity and passion that Keen Home represents, and they want to go along for the ride.
Obtaining a loan for your small business is no easy feat, but it doesn’t have to be an insurmountable challenge. Small business lending experts agree that the best way to avoid trouble is to prepare for the challenges that the application process may present.
“A lot of the frustration around obtaining small business financing can be eased by doing your due diligence,” said Michael Adam, founder and CEO of Bankmybiz, a site that connects business owners with business funders. “Be prepared, and have all your documents ready to present to lenders.” [See Related Story: Small Business Financing Trends: What You Need to Know]
Myth No. 2: You have to have perfect credit to get a small business loan.
Although low credit scores might have precluded you from getting a loan in years past, today’s lending environment is more open to subpar credit ratings.
“While traditional banks may be restrictive when it comes to obtaining credit, there are alternative options,” said Michael Kevitch, president and founder of Small Business Funding.
Alternative lending sites such as Small Business Funding tend to base lending decisions on the financial realities of a business rather than the financial history of business owners. Specifically, Kevitch said, alternative lenders take a close look at business performance, industry type, time in business and cash flow before handing out a loan.
Traditional lending institutions have been a mainstay of small business funding for many decades, and still are in some industries. But they are not the only sources of financing.
For business owners looking to borrow a relatively small sum (between $5,000 and $250,000), getting a bank loan is likely to be more trouble than it’s worth, Kevitch said. However, he noted that bank loans may still be appropriate for business owners who need to borrow a large amount of cash, over a long period, and still get a low interest rate. Kevitch advised business owners to make sure they fall under those categories before applying through a bank.
Kevitch noted that alternative lending sources often provide faster approvals; sometimes, businesses can obtain access to the funds in as little as seven days, he said.
Myth No. 4: The worst way to obtain a loan for your business is through a bank.
Bank loans may not be the best option for every small business, but they’re far from the worst funding option out there. In fact, for established businesses looking to grow at a moderate rate, traditional bank funding is generally a great option, Adam said. It’s when a business doesn’t fit those criteria that business owners should consider shopping around.
“If you are a younger company, pre-revenue or low revenue — but plan to grow very quickly due to the industry that you’re in (e.g., health care, IT or software consulting) — then a traditional bank loan may actually limit your growth,” Adam said.
To decide whether a bank loan is right for your business, research both traditional loans and alternative funding sources. It’s also important to know your business inside and out.
“If you anticipate steady growth over the next few years, then a traditional bank may be best,” Adam said. “If you are growing like crazy and you know you will need to keep increasing your loan size by large increments each quarter, then entertain a nonbank lending partner, as banks may not be able to keep up with your needs.”
Myth No. 5: The more money you ask for, the less likely you are to be approved for a small business loan.
You may find this myth floating around online forums and perhaps even hear it from well-meaning friends and family members. It’s all right to ask for money, nonexperts will tell you; just don’t ask for too much. While this might be reasonable advice in personal circumstances, there’s not much truth to it in the business world.
According to Jess Harris, content and social manager of business lender Kabbage, a working paper from Harvard Business School revealed that banks actually prefer lending larger amounts because they make more profit from large loans in the long run. In turn, banks are cutting back on smaller loans.
Evan Singer, general manager at online Small Business Administration loan program SmartBiz Loans, said a business should apply for the amount it needs — no more and no less. He recommends considering both how much money you really need to grow your business, and how much money you can afford to pay back every month.
“Make sure that you have cash flow to make your loan payments,” Singer said. “That’s the biggest thing that a [lender] is going to check — that [the business owner] can actually afford to make their loan payments.”
Myth No. 6: The most important thing you need in order to obtain a small business loan is a good business plan.
There are multiple perspectives on whether a traditional business plan still has a place in the loan application process. Some funding experts believe that the method of using a business plan to measure the likely success and fundability of a business is a bit outdated. Singer said that although traditional banks might still require business plans during the loan application process, online lenders typically don’t look for it.
And although Adam agrees that most lenders won’t require a full-fledged business plan, he does think that having a plan at the ready is always a good idea.
“Every business should have some sort of business plan,” Adam said. “It’s just a good practice to anticipate growth, set milestones and keep yourself accountable. If you don’t have one, create one. You’ll be glad you did in the long run.”
Myth No. 7: The most important factor to look at is the interest rate.
Although interest rates are an important aspect to consider when choosing a lender, there are many other factors to keep in mind. Harris suggested asking how much it will cost, what the terms of the loan are, how soon you need to repay the money, and what you can use the loan for.
For the second year in a row, cities in the South give entrepreneurs the best chances to keep their startup costs low, while big cities remain among the most expensive places to start a new business, new research finds.
The study from SmartAsset revealed that nine of the 10 cheapest cities to start a new business in are in southern states, including three in Tennessee.
To find the cities with the lowest startup costs, SmartAsset collected data on the typical costs of starting and running a business in 80 of the largest cities in the United States. They calculated the total expected startup costs over the first year of operation for a company based on five factors
- 1,000 square feet of office space.
- The cost of gas and electricity for a 1,000-square-foot office.
- The average cost of filing fees for either incorporation or filing as an LLC.
- Legal and accounting fees.
- Payroll costs for five full-time employees, earning the city’s median annual salary.
Topping this year’s rankings of the most affordable cities for startups is Chattanooga, Tennessee. The city is attractive for entrepreneurs looking to save money because of its relatively low costs for office space and employee payroll. The research shows that it would cost $225,442 for a business owner with five employees and a 1,000-square-foot office to run a first-year startup there. That’s up about 2 percent from a year ago when the costs were $221,000. [See Related Story: 15 Important Startup Lessons for New Entrepreneurs]
“If you decide to start a business in the Gig City, you’ll be in good company,” the study’s authors wrote. “Many startups and accelerators operate there, including the Lamp Post Group and Gigtank 365.”
Overall, the 10 most affordable cities to launch a startup in are:
- Chattanooga, Tennessee: $225,442
- Wichita, Kansas: $232,057
- Greensboro, North Carolina: $232,326
- Columbia, South Carolina: $232,541
- Knoxville, Tennessee: $232,620
- Little Rock, Arkansas: $233,877
- Memphis, Tennessee: $234,524
- Lexington, Kentucky: $234,945
- Orlando, Florida: $236,513
- Winston-Salem, North Carolina: $237,983
It’s been a four full months since the Title III equity crowdfunding provision of the Jumpstart Our Businesses (JOBS) Act went into effect, allowing small businesses and startups to raise up to $1 million annually in crowdfunded securities investments from both accredited and nonaccredited investors. As of Sept. 15, businesses had raised more than $7 million in capital investments using Title III.
Although Title III is a particularly young section of the JOBS Act, it’s been hailed as a potential game changer for small-scale financing. Whether a company’s projected growth is too flat to interest venture capitalists or an owner simply doesn’t want to end up beholden to one highly powerful investor, Title III is seen as a way to raise growth capital without sacrificing independence. Moreover, campaigns can be targeted at locals within a business’s community, helping to build a loyal customer base that maintains a stake in the company’s success. [See Related Story: Title III Crowdfunding Ruling Changes Startup Fundraising for Good]
“I think Title III will change financing. If you look at how the industry evolved in Great Britain when they did it, we’re already growing faster than they were,” Mike Norman, CEO of equity crowdfunding platform WeFunder, said. “It will take a little time, as any new securities legislation does. Awareness is the biggest challenge right now. A true test and the most compelling part is that we now have companies that have raised meaningful funds from investors. How can they activate those investors in terms of promotion and customer loyalty?”
“The very truthful reason we got into equity crowdfunding is that we struggled to raise capital from traditional [venture capitalists],” Chad Newell, CEO of Snapwire, told Business News Daily. “We were such a leader in doing this — nobody had run a successful campaign yet at the time. I had little expectations other than a fair degree of confidence that we’d be successful.”
For Newell, the key to success is about the market response to an idea, and Snapwire was lucky enough to have that 300,000-strong community of photographers who wanted to see the company succeed, he said.
“The crowd collectively makes the decision as to whether this is a good investment or not,” Newell said. “We’re 273 percent funded now, and we’re going for the full” legally permitted amount of $1 million.
Vincent Bradley, CEO of equity crowdfunding platform FlashFunders, said he is convinced Title III holds the potential to revolutionize finance for truly small businesses. While Bradley acknowledged that the provision is still in its infancy and there’s “work to be done,” he said equity crowdfunding holds special promise for brick-and-mortar businesses and those in highly regulated industries, such as alcohol or health care.
“Where this will change the game and we’ll see a paradigm shift is with brick-and-mortar small businesses that are getting crushed in this economy because lending has stopped for small businesses,” Bradley said. “There needs to be an injection of capital, and I think that this is going to have a huge, huge, humongous impact on mom-and-pop, brick-and-mortar businesses as education improves. Right now, nine out of 10 people that I talk to don’t know what equity crowdfunding is … so that’s the job we need to do.”
That lack of education is the only thing holding Title III back, Ron Miller, CEO of crowdfunding platform StartEngine, said. As equity crowdfunding becomes more ubiquitous in the marketplace, it will gain “considerable traction,” Miller said.
“The structure of how small businesses have been financed has been set in motion for many years by tradition and practice,” Miller said. “This has all come around in [four] months and gained a lot of traction in a short period of time. That said, to succeed, it’s likely to continue to require the perseverance of the industry, as well as founders and entrepreneurs who want to use that tool to raise capital to grow their companies.”
A larger piece of the awareness challenge is anchoring a business within a local community, giving neighbors a stake in one another’s entrepreneurial endeavors, Norman said. By generating excitement and incentive to support one another, as well as by keeping the lion’s share of the profits in the local economy, Title III can actually serve as a democratizing force, he added.
“There’s this idea that if you give local residents ownership in their community, they can benefit in some way, shape or form from additional value flowing into communities and rising property values,” Norman said. “And it’s not just on the investors-making-money side, but also in job creation. It’s helping businesses expand and hire more people from the local neighborhood. The vehicle to make that happen didn’t exist before.”
And the data show that small investments are driving equity crowdfunding forward. According to data compiled by WeFunder across the entire industry, more than 70 percent of Title III investments were under $500, while more than 30 percent were exactly $100. The power of crowdfunding is wrapped up in large groups of people chipping in small amounts to support companies they feel passionate about or connected to.
That’s where future success will come from, said Grant Harvey, who worked as an advisor on several equity crowdfunding campaigns.
“As of now, I’m impressed with the amount that has been raised. The fact [is] that it’s about $7 million worth of money [that] has been raised, but obviously, if you look at the bulk of the campaigns, a lot of the successful ones are about $100,000,” Harvey said. “That’s small compared to the bigger landscape of angels and VCs, but my take is that this is a really good opportunity for companies that have an instant buy-in to the community, from a larger group of people.”
When that happens, he added, the incentive becomes clear for those small-scale investors to patronize the business and spread the word to their friends and family, opening the door to an entirely new form of entrepreneur-community cooperation.