Where Does the Money Come From? Funding options for Entrepreneurs

By: Yasmin Ranade

June 17, 2016

They have ideas. They have passion. They have business plans. They have an extraordinary work ethic. They are featured characters in popular Hollywood movies like Jennifer Lawrence’s role in Joy. But, where does the startup money come from?

Canadian banks certainly offer a variety of banking services and support, including business planning tools, startup loans, operational loans, lines of credit, and a variety of banking services that cater to small business. The credit unions, too. According to a recent Meridian Credit Union survey, 19 per cent of Ontario small business owners felt their greatest challenge was raising capital when starting their business.

WE_ Tabitha & Logo

Tabatha Creighton

Tabatha Creighton and Lisa Ohman, co-owners of InvestNextDoor, have created another lending solution “that enables small businesses to borrow directly from investors,” explained Creighton, CEO, InvestNextDoor. “InvestNextDoor is an online platform that enables small businesses to borrow from a variety of community capital sources to [hopefully] secure better options at better rates.”

We’ve seen how social media has exponentially raised the practice of crowdfunding for a wide variety of organizations and causes over the past decade, and now this model of raising capital from others is becoming a financing option for entrepreneurs.

Creighton further stated, “We make investing in small businesses a smart and convenient investment option for everyone, and provide businesses with access to funding to fair market rates. We are working towards this goal by partnering with leading community-focused organizations such as Meridian Credit Union and credit specialists like Equifax.  We love to partner with banks, big and small.  We’re filling a gap the banks aren’t structured to fill. We provide education and we provide the platform that makes lending money directly to small businesses accessible and efficient.”

With 18-months of experience in the U.S. and excited to be launching this summer in Canada, Creighton explained, “We think Canada is ready for new and better options for borrowing – communities have been pulling together to help each other through crowd funding for a couple of years, and this is the next logical step in crowd-based support of business. Creighton added, “Market data suggests a multi-billion dollar gap in the market for small business borrowing, particularly for the quickest growing demographic groups, millennials and new Canadians. Banking is going to look really different for our kids, than it did for us.”

InvestNextDoor will market their model through partnering with credit unions, investment advisors, economic development offices, and chambers of commerce.

I asked Ms. Creighton to describe what small business factors most appeal to investors.  “Investors like small businesses with community support, a strong path to cash flow, and reasonable rates of return,” said Creighton.  “They like businesses that they can relate to, so ones with a social media presence they can engage in, and products and services that they can support.”

Other entrepreneurs, like Joelle MacPhee, director of marketing, Ooka Island, sought her target customer for early operational revenue.

Joelle MacPhee

Joelle MacPhee

“Find your customer and get in front of them,” advised MacPhee. “Rather than chasing investors or borrowing money, try to bootstrap it while finding the people who will actually pay for what you want to build. If you can land customers early, you can begin to develop personas and your business case becomes a lot more viable,” explained MacPhee. “Funding can be great when the plan for the proceeds means more revenue, but when you are just starting out and still figuring if what you have has legs, raising money or taking on debt shouldn’t be the priority; getting customers should.”

MacPhee also garnered government funding support for Ooka Island using the IRAP Youth Employment Program (YEP) to on-board new employees. “YEP was designed to assist funding of hiring young Canadian post-secondary graduates. The max support is $15,000 (80 percent of a salary) for a period of six to twelve months,” shared MacPhee. “We also received Embark Funding [from the Youth Business Acceleration Program (BAP)], which was developed to help startups hire [for] a business role who will work with the venture to help reach specific goals or milestones. It was $20,000 in funding and we were required to contribute $2,500 or 12.5 percent of the amount requested.”

While also leveraging government funding, Liz Dickinson, Founder & CEO of MIO Global, employed a hybrid approach for financing.

Liz Dickinson

Liz Dickinson

MIO Global provides heart rate wristbands and watches to track fitness and recovery to help athletes train smarter and reach their fitness goals.

Shared Dickinson, “I funded the business from our own resources. Then, I sought angel investment. We used as many sources of working capital as possible; factoring our invoices, purchase order financing [and so on]. We raised a series A round from a strategic investor and Canada’s EDC lent us the capital we needed to cover working capital for inventory. The EDC has been an outstanding partner to us.”

Some incubators, like Toronto-based DMZ, for example, offer entrepreneurs another path to funding. The DMZ screening and application process is rigorous, but there are rich opportunities who make it though its own version of ‘Dragon’s Den’.

Alysha D'Souza

Alysha D’Souza

In fact, as well as offering a dynamic work space and a robust mentorship program, DMZ “provides training and education in areas of legal requirements, sales, pitching, team management, hiring, budgeting and funding,” explained Alysha D’Souza, Start-up Experience Coordinator for the DMZ. “I participate in selecting startups to be part of our program, as well as oversee our mentor and advisor program, connect startups with relevant people and endorse them for specific resources like funding programs, discounts and perks, talent/potential hires, sales and pitch opportunities, and media contacts.”

Neethi Passi, CEO and founder of mywedhelper.com, and recipient of the Women in Entrepreneurship award through MasterCard Canadaand DMZ, currently runs her business out of DMZ.

Neeti Passi

Neeti Passi

“Money is tough to get and find,” shared Passi, “so if you are thinking about launching a business, make sure that you have a solid revenue model that can grow and support the operations of your business. Investors want to know that you can make money and the market will bear the price of your product: test, test and test again. You need to prove that your ideas is financially viable.”

Canadian startups are certainly saving, planning and doing their research to find funding.

WhatsYourTech.ca recently conducted a poll asking small business owners about their funding source, and more than 300 readers quickly responded:

Are you a start up? How did you get funding?  
Bank 15%
Government 10%
Angel Investor 8%
VC 5%
Family 21%
Personal Savings 41%

Seems that personal savings and family support represent the funding solution for nearly two thirds of the entrepreneurs who responded to our poll. Our readers also let us know that they often worked two jobs or continue with their ‘9 to 5’ or ‘5-9’ jobs while also establishing their startup.

Angel investing is another sought-after funding option. Stay tuned to this Women Entrepreneurs series for more information.

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