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In the Money?

Financing your startup can be tricky. Learn the steps this entrepreneur took to polish his image for investors.

Last month, we learned of Scott Duffy's travels--both on the road and inside himself--as he made his way to his destination: launching Self Storage Capital Group in Santa Monica, California. Like Duffy, most entrepreneurs start out feeling enthusiastic about their business idea; however, actually financing that startup can have a stalling effect for those unable to secure the necessary capital. This month, Duffy, 34, explains how he did it and shares some valuable lessons he learned along the way.

For the type of business deals Duffy wants to do, he'll need a large amount of money and will eventually approach investors for it. But before that can happen, he has to get his own house in order, as he puts it. Since sophisticated investors would check Duffy's financial background to see whether he has good credit and if he pays the bills on time, he spent the year before he left Fox Sports' Internet division focusing on his credit, ensuring it would be exceptional.

Obtaining his credit-score reports from all the credit agencies allowed him to see what had been reported about him. "People would really be surprised at how many inaccuracies there are on the credit report, how it affects you, and how it affects people's perception of how safe of an investment you are," says Duffy. Having recently learned that one agency scored him above 720, which is considered excellent, Duffy is pleased. "You have to get your background down and how it relates to this industry, get your team together, get your personal finances in order, and have your credit in order," he advises. "Once I had those things in place, a lot of my initial startup fears really went by the wayside."

Since Self Storage Capital Group has been designated as a holding company or a general partner, Duffy will need to raise money for each acquisition or development deal. That means finding investors who will act as limited partners to provide the capital. Before meeting with investors, though, Duffy knew he had some work to do. "A sophisticated investor is going to open your business plan and turn to your last page [where your financial performance is listed]. All they care about is the bottom line," says Duffy. "They're going to be tough, so you must know your stuff." A thorough understanding of where money will be made is important and so is having realistic expectations. You also need to consider what your investors will expect regarding returns and deal structure.

Next, he had to handle the costs of providing for himself, his wife and the business until a deal was made. Duffy decided to use his savings until he launched his business in May 2003. Other financing options could be loans, margin accounts, refinancing your home, working odd jobs, and investments from friends and family. "I thought of that money I put aside as my investment," says Duffy of the $250,000 in savings he had accumulated from his lucrative tech days. "It's hard, because at the end of the month, until you're generating any revenue, you're writing a check. It all comes down to the mind-set, knowing what you're getting into and knowing how long it will take you before you get to a comfortable place financially. Know what you're in for."

Duffy's business isn't profitable yet, but his wife, Tera, helps support the family by working as an art director and graphic designer. "I'm doing this for the first time with a spouse. It was really tough at first, and it still is at times," says Duffy, who's been married a year and a half. Thanks to a suggestion from a friend to talk to a mentor who would present the couple with a list of questions to consider before starting the business, they discussed areas that would impact their relationship, such as one day starting a family and Duffy's business travel. Compromises had to be made--for a year, Duffy worked on the business plan from 4 a.m. to 7:30 a.m. each morning and only devoted an hour after work each day so they could have the evening together. "You can't be absolutely certain whether a business will succeed or fail," says Duffy. "But family's there no matter what, provided you spend time and nurture those relationships."

Duffy has met with a few investors, but it took hiring business coach Tim O'Brien to bring something significant to his attention that Duffy hadn't considered when planning his business. Duffy was sending the wrong message with his appearance. His informal meetings with potential investors found him wearing jeans and T-shirts. O'Brien, who asked for investors' feedback, discovered that Duffy's appearance didn't match his message. In addition, the message didn't communicate the true value of his business and how investors would benefit from it. After becoming a suit-and-tie man and honing his message--his "15-second commercial"--Duffy was ready to show them he was all business.

Next month, you'll learn if Duffy was successful in finding investors and how he'll strike that first deal.

SUPPORT SYSTEMS
There are two basic ways you can finance a business: equity financing or debt financing. In equity financing, you receive capital in exchange for part ownership in the company. In debt financing, you receive capital in the form of a loan, which must be paid back.

Equity financing can come from a variety of sources, including venture capital firms and private investors. Whichever source you choose, there are some basics you should understand before you try to get equity capital. An investor's "share in your company" comes in various forms. If your company is incorporated, the investor might bargain for shares of stock. Alternatively, an investor who wants to be involved in the management of the company could come in as a partner.

Keeping control of your company can be more difficult when you are working with outside investors who provide equity financing. Before seeking outside investment, make the most of your own resources to build the company. "The more value you can add before you go to the well, the better," says John R. Thorne, a professor emeritus of entrepreneurship at Carnegie Mellon Graduate School of Industrial Administration in Pittsburgh. If all you bring to the table is a good idea and some talent, an investor may not be willing to provide a large chunk of capital without receiving a controlling share of the ownership in return. As a result, you could end up losing control of the business you started.

Don't assume the first investor to express interest in your business is a godsend. Even someone who seems to share your vision for the company could be bad news. "It pays to know your investor," Thorne says. An investor who doesn't understand your business may pull the plug at the wrong time-and end up destroying the company. Adapted from the third edition of Start Your Own Business: The Only Start-Up Book You'll Ever Need (Entrepreneur Press), by Rieva Lesonsky and the editors of Entrepreneur magazine.

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the May 2004 print edition of Entrepreneur with the headline: In the Money?.

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