You have to have an exit. One of the best exit strategies is to get bought by a larger company–or even a competitor.
You can even start your business by getting funding from your eventual purchaser. You propose to a corporation that you will develop a product or concept for them–using money they give you to develop it–and if it works out, you can sell the company to them for an even higher multiple. This actually works because of the lower risk profile of large companies: they will gladly give you $500K to develop a really great idea, then buy you out for $5 million down the line, rather than take on the task themselves. They may not have the time or resources to spend trying out a bunch of risky ideas, but giving you $500K to give it a shot may be short money from their perspective, as you’re the one assuming all the risk.
If you do pitch to investors, this is a great thing to mention. It shows that you have considered how the investors are going to get their money back out, which is really all that’s important to them.
By the way: if you take equity financing, you have to sell the business. You have to. If the value of the business is all wrapped up in the business itself, then how does the investor get paid? You might own the portion of your house that you’ve paid off–that’s equity, by the way–but you can’t turn it into cash unless you sell it. Same thing.
You are very unlikely to get venture financing.
Of the approximately 500,000 companies formed in the US annually, only about 1 in 5 is not a sole proprietorship–your barber, your general contractor, your freelance writer. There are about 3500 venture capital deals per year, including additional rounds of financing (additional money paid into a business to help it continue to grow). Figure that only about a third of those are first-round financing.
That means you have about a 1% chance to get first-round venture funding for your business. You are unlikely to be in that 1% for several reasons.
First, you probably aren’t fundable enough. You really, really, really have to have your ducks in a row to get VC money. VCs like to see people with experience in startups; ideally, you will have founded and run a previous startup that achieved great success using VC funding.
Yes, that means that in order to get VC funding, it helps to have gotten it in the past.
Second, your idea probably isn’t right for a VC. That doesn’t mean it’s a bad idea. It just means that it isn’t capable of generating the 10 to 20X return on investment that VCs require.
A quick explanation: a given venture fund may have 10 investments outstanding at a given time. Of those, 5-6 are likely to be a complete bust in which the VCs lose all the money they put into the business. 2-3 might break even, or allow them to get close to doubling their investment. Ideally, 1-2 are what they call home runs, which generate ten times the initial investment and then some. Those home runs cover the losses from the rest of the portfolio, and generate the profit that is the reason why VCs exist.
Suppose that you want to run a hot dog stand. You may have worked at another hot dog stand for years. You may have a perfect marketing plan, a really unique hot dog, and tons of testimonials from people who have tried and loved your hot dogs. All you need to grow is a quick investment of $100K to buy a stand and do some advertising.
It’s a great business. It’s likely to be profitable for you and sustainable in the long term. No VC is going to touch it.
Why? Well, how is a single hot dog stand going to have a chance of someday generating $100 million in revenue? How is it even worth their time and effort to evaluate your business plan if it doesn’t have a chance of being an absolute home run?
Bootstrap it. Start selling your hot dogs out of your car, or out of your house. Cater birthday parties for kids; they love hot dogs. Save up some money and buy a used stand, the cheapest you can find, don’t take a salary, and reinvest the profits until you get bigger.
You can do the business. Just accept that it’s not going to be the next Amazon.com, and it’s going to take a different sort of entrepreneurial financing.