know before you grow

Houston entrepreneur gives his advice on navigating the evolving fundraising process

From debt and equity funds to crowdfunding and angel investment, here's what you need to know about the fundraising world from an expert who's in it. Getty Images

New businesses face many challenges when getting started, but perhaps none are as challenging and intimidating as how to secure the funding needed to start and grow your business.

Funding options have evolved considerably over the past several years, providing business owners with more choices than ever to fund their business. Founders should not just think about selecting one option but how to combine multiple options into a funding strategy that best suits their business needs.

Over 600,000 new businesses are started in the United States each year, and even with more fundraising options, we are increasingly seeing businesses struggle to get funded, so businesses need to be smart about putting together a funding strategy.

The traditional way to fund a business
With that piece of advice out of the way, there are two primary categories of capital: debt and equity. For your business, debt options may include personal loans, business loans, asset-based loans, revenue participation notes and factoring (where you sell your receivables at a discount in order to collect cash now).

Debt is great as it means you're not giving away equity, but, at the same time, the loan must eventually be paid back (with interest) and some businesses such as technology start-ups may not generate the cash flow needed to make this happen from day one. Loans can also be difficult to access or may require the business owner to put up a personal guarantee, although there are organizations that facilitate this such as Small Business Association. If this is the best route for your business, take the time to find the right lending organization.

Equity options include common stock and preferred stock, as well as convertible note instruments that are initially treated as debt but "convert" to equity at a future financing event. Unlike traditional equity, convertible note instruments allow you to delay establishing a valuation for your business, which can be challenging for startups. SAFE (Simple Agreement for Future Equity) and KISS (Keep It Simple Securities) Notes are emerging securities which are less frequent but are seen as more Founder friendly and are similar in some ways to convertible notes.

There are a lot of business owners that are cautious of giving away equity (and rightly so) but with the right advice on structuring securities and valuation, this can be a great source of capital, as well as knowledge and support if you find the right investors and partners.

Sources of funding for both debt and equity include friends, family, banks, angel investors, venture capital, private equity, and organizations such as the Small Business Association. The accessibility of these various options will depend on the maturity of your business, your industry and the needs of your company. Often, early-stage companies may source "seed" funding from friends, family, and angel investors, while venture capital, private equity, and debt become increasingly accessible at later stages as revenues grow.

How is funding changing?
Options for funding a business and investing have evolved considerably in recent years. Crowdsourcing, which can be defined as the process of obtaining needed services, ideas, or content by soliciting contributions from a large group of people, and especially from an online community, has taken the world by storm. Companies such as Uber, AirBnb, and Grubhub all leverage "the crowd" to provide a service.

Crowdsourcing has made its way to finance as well, where companies such as GoFundMe and KickStarter have provided new tools to fund charitable causes and projects. The Jumpstart Our Business Startups Act (JOBS Act) of 2012 set in motion a series of regulatory changes that allowed anybody (not just high wealth individuals) to invest in private businesses and provided crowdfunding as an option to raise capital for small businesses.

Online crowdfunding portals such as LetsLaunch, SeedInvest, and WeFunder offer both debt and equity options for investors to invest in your business. Not only can this be a great way to build up a loyal customer base, test your product and get some great marketing exposure but it can also be a great way to supplement the traditional funding strategies mentioned above.

However you choose to fund your business, take the time to work through the options (both traditional and emerging) and find the right option or combination of options to meet your business needs.

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Nick Carnrite is managing director of Carnrite Group and co-founder and CEO of LetsLaunch.

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Building Houston

 
 

Devin Dunn leads TMC's HealthTech Accelerator, which is getting ready to welcome its next cohort in January. Photo via TMC.edu

For almost a decade the Texas Medical Center has been cultivating health tech innovation by accelerating life science startups. As it has evolved to meet the needs of both its early-stage companies and its member institutions, TMC Innovation has re-evaluated existing programming, introduced new initiatives, and on boarded leaders to represent the organization's mission — the latest of whom, is Devin Dunn.

Earlier this year, Dunn joined TMC Innovation as head of TMC's HealthTech Accelerator, a career move that represented Dunn's move to a different side of the startup world. As an early employee at London-based Huma, Dunn was instrumental in growing the health tech company from its early stages to international market expansion.

"I really like working with the dreamers and helping them work backwards to (figure out) what are the milestones we can work toward to make the grand vision come true in the future," Dunn says on this week's episode of the Houston Innovators Podcast. "The opportunity to work with different founders on that same journey that we had been through was really appealing."

Dunn oversees the accelerator, which has evolved from TMCx. The program offers health tech acceleration to two cohorts a year. Each group of startups is selected from around the world and invited to join the program — first at a bootcamp, a week long itinerary of meeting leadership from within TMC Innovation as well as its member institutions, before a smaller group of companies in invited to return to the TMC for six months of hands-on acceleration from the TMC.

Earlier this month, TMC Innovation hosted nine health tech companies at its fall bootcamp. Now, as Dunn explains, the team is extending invites to a select number of those companies and working on a set of objectives for each company to work on when they return to the TMC in January.

"We've had a week to learn about the companies, and they've had a week to learn about us and about Houston, and we'll come back to the table to see if it's a match," Dunn says. "Part of that process is developing a prescription, which is three to four key objectives we co-develop with the founders."

The selected companies will work with TMC Innovation as well as the greater TMC community on these objectives until May, when the whole process starts over with another set of companies in bootcamp. Across the board, Dunn says TMC Innovation is focused on providing support for startups looking for clinical validation — something all companies are challenged with at some point.

"One of the things our program focuses on a lot is opportunities for that clinical validation. How can you work with clinical champions, health systems, and various providers to get the clinical and efficacy data you need to show that your solution really does add value," Dunn says. "That's one of the hallmarks of our program."

Over the past few years, TMC Innovation has expanded its global presence by attracting international cohorts and forming relationships with other countries through what TMC calls their Biobridges. Dunn shares on the show about TMC's latest international initiative with InnovateUK on the show. Listen to the interview below — or wherever you stream your podcasts — and subscribe for weekly episodes.

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