Contrary to popular belief, business plans do not generate commercial financing. It is true that there are many types of financing options that require a business plan, but no one invests in a business plan.

Investors need a business plan as a document that conveys ideas and information, but they invest in a company, a product, and people.

Myths about small business financing:

Venture capital is a growing opportunity to finance companies. In reality, venture capital financing is very rare. I’ll explain more later, but I guess only a few high-growth plans with high-powered management teams are risky opportunities.

Bank loans are the most likely option for financing a new business. In reality, banks do not finance business start-ups. I’ll have more on that later too. Banks are not supposed to invest depositors’ money in new businesses.

Business plans sell to investors. They don’t really have a well-written and compelling business plan (or pitch) that can sell your business idea to investors, but you’ll also have to convince those investors that you are worth investing in. When it comes to investing, it is as much about whether you are the right person to run your business and the viability of your business idea.

I’m not saying you shouldn’t have a business plan. Should. Your business plan is an essential piece of the financing puzzle, explaining exactly how much money you need, where it will go, and how long it will take to get it back. Everyone you talk to will be waiting to see your business plan.

But depending on the type of business you have and what your market opportunities are, you must tailor your search for financing and your approach. Don’t waste time looking for the wrong type of financing.

Where to look for money

The money search process must match the needs of the business. Where you look for money and how you look for money depends on your business and the type of money you need. There is a huge difference, for example, between an Internet-related high-growth company seeking second-round venture financing and a local retail store seeking to fund a second location.

In the following sections of this article, I’ll talk more specifically about the different types of investment and loans available to help you finance your business.

1. Venture capital

The venture capital business is often misunderstood. Many start-ups resent venture capital firms for not investing in risky startups or ventures. People speak of venture capitalists as sharks, because of their supposedly predatory business practices, or sheep, because they supposedly think like a flock, all wanting the same kind of deals.

This is not the case. The venture capital business is just that: a business. The people we call venture capitalists are entrepreneurs who are tasked with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk / return ratios required by the sources of their capital.

Venture capital should not be considered a source of funding for some exceptional startups. Venture capital cannot afford to invest in startups unless there is an unusual combination of product opportunity, market opportunity, and proven management. A venture capital investment must have a reasonable probability of producing a ten-fold increase in business value within three years. You need to focus on newer products and markets that can reasonably project sales growth in huge multiples over a short period of time. You need to work with proven managers who have dealt with successful startups in the past.

If you are a potential venture capital investment, you probably already know. You have members of the management team who have already been through that. You can convince yourself, and a room full of smart people, that your business can grow tenfold in three years.

If you have to wonder if your startup is a potential venture capital opportunity, it probably isn’t. People in new growth industries, multimedia communications, biotechnology, or the far limits of high-tech products are generally aware of venture capital and venture capital opportunities.

If you are looking for names and addresses of venture capitalists, start with the internet.

The names and addresses of the venture capitalists are also available in a couple of annual directories:

The Western Association of Venture Capitalists publishes an annual directory. This organization includes the majority of California venture capitalists based in Menlo Park, CA, which is home to a staggering percentage of the nation’s venture capital firms.

The Pratt Venture Capital Sources Guide is an annual directory available online or in print.

2. Type of venture capital: angels and others

Venture capital is not the only source of investment for startups or small businesses. Many companies are financed by small investors in what is called “private placement”. For example, in some areas there are groups of potential investors who meet occasionally to hear proposals. There are also wealthy people who occasionally invest in startups. In the tradition of business start-ups, groups of investors are often referred to as “doctors and dentists,” and individual investors are often referred to as “angels.” Many entrepreneurs turn to friends and family for investments.

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