Is Your Business Fundable? 3 Types of Businesses and Managing Entrepreneur's Expectations While Raising Capital

Lifestyle vs. Mainstreet vs. Venture Backable. Why Knowing the difference Matters.

Entrepreneurship is transformative. It has been a tool to generate wealth, act as a survival tactic, empower, and increase knowledge and transferable skills. Businesses are created out of opportunity or necessity. Business owners can come from all walks of life, with different backgrounds and expertise. If you look at a distressed community, one that has experienced rioting in the last 60+ years (Los Angeles, Cincinnati, Ferguson), I'll show you a community without ownership and legitimate entrepreneurial support. Even for those with a 9 to 5, the determination, resourcefulness, and creativity is something that is starting to become a norm, hence the term intrapreneur. Yet, the statistics for the external funding for entrepreneurs, especially entrepreneurs of color, women, or low to moderate income - are bleak, skewed, and have splashed the headlines of many mainstream platforms. Right on time for April, which has been positioned to be financial literacy month, it's important that we continue to address the access to capital issue. Now, I'd be remiss if I didn't acknowledge the systemic, policy, discriminatory elephants in the room as well. However, I want to also acknowledge the other side of the funding issue, one that the business owner has to take onus for.

When you take other people's/institution's monies, you are going to have to meet their requirements and play by their rules.

Also, taking on being a business owner, is a play at your own risk activity. It is not for the faint of heart or the indecisive.

Let's be truthful. Everyone wants to love and back a winner. Especially those with olympian- like wins, revenue, and traction. Are you the best in class for the industry, years, and resource input? How does your business rank? This month's piece is to address the other side of the odds being stacked against the entrepreneur. Entrepreneur, business owner, we need to have a serious come to senses meeting, step into my office.

This blog piece will settle and manage the expectations of current business owners that may be disillusioned about where their business stands in comparison to others in the same atmosphere. This is also going to address for those wanting to start their own businesses, what lays ahead of you with the type of business that you pursue. First let's diagnose the types of business categories, the characteristics and funding opportunities associated:

1. Lifestyle Business. Lifestyle businesses are created to create or maintain the lifestyle of the owner. Typically they can be solo owned and operated. The business may or may not have formalized plans and may purely be a hobby or passion project that has found a few customers. Typically doesn't generate net revenue past $250K, especially if there isn't more than one employee. Examples of clients I have served with these businesses are insurance salesman, those selling white-labeled products (coffee, waist beads, etc), and seasonal consultants. These businesses have relatively low start up costs and can be executed at convenience. Often these businesses are lacking formalized payment systems as well, meaning that most transactions are handled through a financial services platform versus a point-of-sale system like Stripe or through a financially regulated institution. Funding for these businesses that do not have a business bank account mainly comes from their sales and friends. For those with bank accounts, corporate grants (which are at the discretion of the corporations and their budgets), or those entrepreneurial support systems with monies to support businesses with low revenue and low number of employees. KIVA or CDFI's may have lending products that can provide some type of support if the business owner has enough influence (KIVA requires crowdfunding) or financial documentation to ask for a micro loan from a CDFI. Online lenders may be able to take a look at transactions that have went through their platform and possibly offer some funding, yet, this funding typically has higher than normal interest rates.
2. Mainstreet Business. Mainstreet can be thought of as the neighborhoods and communities that surround where we live. There are businesses that provide products and services that add to the everyday living of that community. My mainstreet clients consists of dentists, restaurant owners, lawyers, nail salons, etc. These business owners are primarily relying on those in a 15 minute radius to be a strong customer base and they are contributing to their community by leasing/owning a property and contributing to the taxes of that local community. Self-Funding, credit cards, managing partners, factoring, startup loans, micro financing, or lines of equity credit contributes mostly to the financing of these businesses. The demand for these businesses may fluctuate. With the costs of operations, uncertainty in market, or the high failure rates often make them often a huge risks for traditional lenders. The positive for these businesses is the impact that occurs when these businesses do well. Especially for these businesses that are 5+ years, I have been able to see where they have 7 figure businesses and employ dozens. Investors for these businesses exists, but they are more often than not those who have ties to the community or owner, and are not about from a venture firm that has a pool of investors tied to it. If you don't believe me, ask the sharks on shark tank to hold their next function at your restaurant, but expect a laugh (or no response) if you ask them to back your business without showing a 10-100X return on a tangible or technology based product. Besides, there's no reason to lose your tie and your shirt over diluting equity unnecessarily, when demand and community can sustain your 7 figure business. Imagine if there were more businesses in that revenue range, it makes for a pretty decent living for a business you can own in your own backyard.
3. Venture/Venture Backable. This is a business that has a sizable addressable market, innovative and unique product or service, and proprietary information or software attached to it. These businesses that have an end game of being acquired or going public. You can grow a business to acquisition or being publicly traded without venture, but it will be a slower climb. Study MailChimp vs. Kabbage to understand these differences. Had a chance to listen to both of those founders at TechCrunch. Slow and steady might of helped the tortoise win the raise but it's only because the hare ran out fuel and slept on the competition. These businesses need to built to compete at the highest level and built to last. The investors you are pitching to are with you until they are exited by the next round of funding, you buy them out, or they are so invested that they take you out of the equation. Your investors have raised money from banks, corporations, high networth individuals, or their angels that have put their own money into the pot - either way, they want their returns. Non-dilutive capital may be possible for their businesses, but becomes difficult to leverage if the company has not generated cash flow, acquired assets, or obtained purchase orders. For those in the venture backed space who have the experience with building their products, the networks, influence, or their own capital, they are miles ahead of the entrepreneur that just has the good idea. That doesn't necessarily make that company or that owner "better" than the person with the good idea. However, with the odds stacked against you, you have to figure out how you'll turn that Ford into a Ferrari, or you will get left in the dust every time. I prefer Chevys myself, car enthusiasts and racers, argue with me about this later. Either way - play to win, or get out the game.

Now ask yourself - have I really built a fundable business?

It is important that we took a deep dive into these three types of businesses because the statistics for funding and the statistics for athletes who make it to big leagues are the same. We can cover the systemic and societal issues and history, but we can also take the time to understand how the game is played and as entrepreneurs you can take the effort to position your company to play at the highest level. It's one thing to have a t-shirt line, it's another to create cotton that uses AI to repair color damage, holes, or unthreading. Entrepreneurship is not a new concept, but it has in the last decades become this buzz word.

I like an matcha latte, with a splash of entrepreneurship please.

For disadvantaged communities, those who were forced into or who are new(er) to the United States, entrepreneurship has served as means to survive or move up in your tax bracket and minimize one less external factor to avoid poverty or discrimination. The impact goes beyond the dollar. Yet, I strongly feel that there is a disconnect and even disillusion about the playing field of entrepreneurship and what an entrepreneur can reasonably expect as result of their decisions regarding the company they build and the effort they put into it. I applaud the communities, centers, institutions, and ecosystem builders that provide the knowledge, community support, de facto entrepreneur therapy, and capital for entrepreneurs of all stages. Similarly, in sports, there are gyms, recreational centers, and sports events for athletes of all kinds and playing ability. Let's be clear, Tom Brady, Steph Curry, Simone Biles, and Iga Switek are not training at the YMCA. Same thing with entrepreneurs. Your company that can be venture backed is not playing in the same game as the waist bead trainers. It is unreasonable to expect that the world of investors to have an interest in investing their long term money in your side hustle. The side hustle isn't necessarily related to the time put into the business, as much as it is the day to operations, business foundations, and exit strategy. It's okay to make a little extra money on the side, or to want a business that serves just your community. 99% of small businesses employ folks, not the major corporations. Let's understand the differences, own up to what level we are playing at, and handle our businesses accordingly.

Desha is an economic development enthusiast and strategic partnerships creator with a successful track record in business/program development. Currently she serves as a Market Manager for Accion Opportunity Fund, Owner of Pantherum Solutions Group, and is a PhD candidate at Clark Atlanta University with entrepreneurship, technology, and disadvantaged communities as her research focus.