How are online businesses funded? Is venture capital an option? How should a board of advisors be paid? For about 2 years, I have had an idea for an informative website on a topic that is really hot, but I still do not know how I can fund it and find partners. I have researched the topic and realized that there is a need; however, I do not have any personal finances to realize my idea. asked by M., financial advisor, Etobicoke, ON

The questions you have asked are important ones and cut to the core of launching a new business venture: (i) Is there a market need for the business? (ii) Where could financing or investment capital be found? (iii) How could qualified advisors be attracted? (iv) What is the Founder’s financial role?

Let’s consider these questions in some detail.

Is there a market need for the business?

You have indicated that you have done some research and believe that there is a need for your business idea. Some additional areas to consider in this regard include the following:

• Size of target market: Are there enough potential customers to make your business viable? Consider how many customers you would have to attract, how frequently, and at what price in order to generate enough sales to cover your expenses and make a profit. Also, potential customers could deal with your company or the competition, which leads us to the next point…

• Presence and impact of competitors: What does the competitive landscape look like in the marketplace? Are there many competitors? Are they large companies? Established companies? Or, is this an emerging area? The target market has to be large enough for one more business (i.e., yours) to be able to attract enough customers to be viable, and not only that, they need to have a reason to choose your business over a competitor, which means that you require a…

• Sustainable competitive advantage: Customers typically have a choice in the marketplace, so it is imperative to be able to demonstrate why your products and services are better, not just for today, but into the future. A sustainable competitive advantage creates a track record of being a “go to” company and is a must to put your business a step ahead of competitors.

If this sounds like a lot of effort, it is. However, these are standard attributes that early stage investors, such as venture capitalists and angel investors, require to be present in an investment opportunity.

In addition, most investors will expect to see a business plan in order to understand the market opportunity, the expected financial results, and to know that you have a sound strategy to take the company forward. For more information on business planning, click here.

Where could financing or investment capital be found?

Start up or early stage businesses typically don’t have the cash flow to support traditional financing (such as from a bank), so that leaves founders/friends/family, high net worth investors (often referred to as ‘angels’), and perhaps venture capitalists as potential sources of capital.

The challenge is that there are typically more investment opportunities than available capital, which means that young companies have to put their best foot forward. This reinforces the need for a viable target market, sound business strategy, and competitive advantage.

For more information on raising early stage capital, click here.

How could qualified advisors be attracted?

Early stage investors often judge young businesses on the company they keep, particularly in terms of advisors. In order to tap into qualified advisors, such as accountants, lawyers, and business resources, seek out organizations and networking groups in your area that work with early stage businesses.

Advisors that work in this area often understand that assisting early stage companies does not mean a quick source of cash, but may be willing to invest the time if they believe in the potential of a particular company. As a result, some advisors may be willing to defer billings or work at a reduced rate for a period of time or exchange their billings for a small equity position in your company. Experienced advisors may also have the network to help young companies find sources of capital or apply for funding programs to offset some of the costs.

Once the company grows and is generating cash flow, advisory boards can be formalized and compensated by way of meeting fees or a retainer; ask around to get information about reasonable rates for comparable companies in your area.

Be careful to ensure that you are working with qualified advisors who can help and be wary of any requests that don’t seem reasonable. It’s a good idea to ask for references and get a second opinion when in doubt.

What is the Founder’s financial role?

Founders often put in hours and hours of time to research and launch a new business. Although there is value in this investment, it doesn’t pay the bills, which means that as the company moves forward, the Founder may be the only one willing to put cash into the business.

In the early stages of a company, this is often reality, and what’s more, financial partners, such as venture capitalists and angels, may not be willing to invest unless the Founder has invested an amount of cash that is significant to them in the business. Early stage investors see this as important to ensure that there is a shared desire to move the company forward and protect the invested capital that is at stake.

Given these challenges, it’s important to thoroughly research a business idea before investing your time and money (and before financial partners are asked to do the same). On the other hand, identify an unmet market need, develop the right strategy, and attract advisors and capital to move the concept to the next level and you never know where it might lead. And therein lies the entrepreneurial dilemma.