There exist many misconceptions regarding funding for small businesses. Some prospective
business owners may believe that obtaining necessary capital for their
startups is an easy and straightforward task, when, in fact, the process
may be more complicated than initially anticipated. For example, many business owners
may feel the need not to implement an effective marketing strategy or prepare a
well-devised business plan, which can often greatly contribute to a company’s failure.
Furthermore, there is an erroneous belief that the U.S. government can offer financial
assistance to those who apply and that
entrepreneurs can increase their chances of acquiring angel capital if they
actively solicit the help from numerous contacts.
The realities of many common myths are explained below. An individual considering
the prospect of
entrepreneurship should be aware that it takes time to evaluate the different
options in order to obtain funding and that they may even experience repeated rejections
before the needed capital is raised.
Myth No. 1- "I can easily find funding for my new business in a few months."
The Truth- Obtaining
start-up funding is a long and tedious process that can actually take years
to achieve. A wise entrepreneur is one who acknowledges this extensive process yet
is patient and seeks all means to accomplish this goal. First, these entrepreneurs
take time out to meticulously research prospective investors with experience in
their field of industry. In the course of this process, they may be rejected multiple
times; however, they still find time to optimize their resources by networking extensively
with others. They also use their rejections as a means to refine their elevator
pitch and devise a well-detailed
business plan. Most investors will not even consider providing necessary
funding for a venture unless the entrepreneur has demonstrated such preparation.
Their invested company’s products and services must also prove to be successful
in trial marketing, which may also take a considerable amount of time to execute.
In addition, entrepreneurs must establish that they have exhausted all other financial
opportunities to launch their business. Along with the due diligence process, which
can take months to achieve, it may be several years until the
entrepreneur is able to obtain desired funding.
Myth No. 2- "My business idea is great and unique. I should get funding right
The Truth- Often times, entrepreneurs are overconfident about their
business ideas and innovations.
Just because they feel that their products or services are marketable does not mean
that their ideas are good enough for investors or the general public. Every year,
thousands of people truly believe that their inventions will be the next "million
dollar" idea, when, in fact, the majority of these ideas will lead to many disappointments.
Many business ideas will
simply not survive in the market due to the competition among major competitors
and the development of further well-devised products. That is why entrepreneurs
need to research and refine their ideas, which takes much needed planning. In fact,
an invention should be test marketed after establishing such preparation in order
to get ample feedback from customers. An invention is considered "fundable" when
a test model (pilot model) can prove that consumers will be willing to pay for the
product(s). This will not only show investors that the company has the potential
for producing a large return on investment, but it also gives time to polish any
flaws before mass production of a product takes place.
Myth No. 3- "I know everything about my business; therefore, I do not need to
create a business plan."
The Truth- According to the United States’ Small Business Administration
(SBA), approximately 90% of all
small businesses fail within the first two years of operation. It is also
striking to note that the majority of these companies have no business plan. If
a business plan exists, it may not be updated or the company may even fail to comply
with their existing plan. This is why most successful entrepreneurs agree that the
key to sustaining a startup is by creating and enforcing an effective business plan.
Most prospective investors will not consider investing in a company without a business
plan, which primarily focuses on daily company operations, the management
team and employees, finances, etc. Business owners and employees are encouraged
to follow their business plan and update it accordingly throughout the development
of their company.
Myth No. 4- "I know how to market my products; therefore, I do not need a marketing
The Truth- A marketing plan is a written document that details
the advertising objectives of a company. It documents a business’ marketing approach
and expenditures in promoting their company, brand, or company’s product line. Many
startups depend on their marketing plan to gain publicity and to promote newly released
products or services. Consumers, on the other hand, are highly influenced to buy
products from companies with effective marketing plans and strategies. Hired professionals
are known to devise successful marketing plans, which are vital components of a
company’s overall investment. Through an effective marketing strategy, plan, and
public relations, an enterprise and their product line can gain public recognition,
further contributing to their success and profitability.
Myth No. 5- "The more investors I contact, the more likely I can find funding."
The Truth- Often times, this myth is accompanied by sending mass
e-mails and direct mail to hundreds of investors with the hope of successfully targeting
prospective ones. Investors will admit that this is clearly the wrong approach when
trying to find investors since mass mailing is considered a waste of money, time,
and energy. Investors who grant small business funding should be sought by quality,
Entrepreneurs are encouraged to thoroughly research several potential investors
at a time who have a solid track record of success in their field of industry. Even
though there is a high probability of rejection, the entrepreneur should not be
discouraged and should continue to research probable investors. Upon this research,
each prospective investor should then be sent a personalized request. By sending
these custom-made requirements, the entrepreneur will gain credibility from
investors, who will recognize them for conducting their own due diligence.
Myth No. 6- "I can easily get funding from the SBA."
The Truth- This is a very common myth of many
entrepreneurs. The fact is that the Small Business Administration (SBA)
does not lend money directly to business owners. Instead, they act as a guarantor
through local lenders in order to stimulate the economy in many communities by promoting
startup growth. A prospective applicant should have a good credit history, proof
of income, a solid business plan, and collateral in order to be considered. Even
though it is smaller in amount than most banks lend to startups, approval of an
SBA loan will increase one’s chance of obtaining additional capital from many lending
Myth No. 7- "I can get government funding for my startup."
The Truth- Most federal grants are available only to medical, scientific,
educational, and non-profit ventures. If a startup does not fall into one of these
categories, they will most likely be rejected for their application. Non-profit
organizations that do get accepted for government grants are usually related to
research or product development. One important fact to mention is that grant funding
is usually awarded in small amounts and is not a sufficient source for financing
a startup. Businesses that acquire grants often depend on multiple
sources of capital, including capital from lending institutions and private
investors. It is also a very competitive process to obtain a federal grant since
there is only limited funding available. Entrepreneurs who strongly believe that
their business falls into the category of receiving government grants should target
different organizations and propose a grant request.
Myth No. 8- "Venture capitalists will give me money for my startup."
The Truth- Venture capitalists usually invest in companies that
are already established, not ones that are in the early stages of development. Due
to the fact that
venture capitalists pool their money from multiple sources, they are extremely
selective with funding applicants, choosing their investments in "safe" companies,
ones that have already established a large degree of success. Angel investors, on
the other hand, typically invest in startups and early stage ventures, companies
that have not yet established any degree of success. They use their own money for
funding young companies, making their investments more "risky" than that of
venture capitalists. However, they are also selective with their applicants,
who need to convince them that their company will produce a large return on investment.
Many of the common small business myths contain some of the most inaccurate
information about funding a startup. Now
that these funding myths have been debunked, it is the entrepreneur’s duty to conduct
their own ample research in order to learn about the credibility of any given information.
In addition, business owners are encouraged to work with skilled professionals with
expertise in their field who can create for them practical business and marketing
plans so that they can successfully find adequate funding for their venture.