You’re a new business starter… You’re not building a startup, where expenses are someone else’s problem, you are building a business. Which means you’ve actually figured out a way to make money. You’re planning to have revenue coming in, expenses going out and that your business turns a profit.
How do you get here? Do you use someone else’s money to begin? Do you need infrastructure (you probably do for a factory, or restaurant, or hotel)? Or are you running a service business? It doesn’t matter which kind of business you’re starting, the best advice I can give you is to use as little outside cash as you can.
“The gods help those who help themselves, and my word, didn’t I help myself.”
― Terry Pratchett, Making Money
You need less than you think. Do you really need to own premises or can you rent a small storage space (or use your basement, or garage), or can you outsource it completely?
Eventually you may need to grow bigger, go the more expensive route, but at the beginning start small, stay frugal, live within your means.
If you do need infrastructure, or want to grow more quickly, and you have great ideas but not enough funding to create a business out of it, you can consider funding to help turn your ideas into a reality.
When it comes to sources of startup funding, there are a few options to consider.
INTRODUCTION TO FiNANCING OPTIONS
There are two primary forms of financing that any business can consider, debt and equity. We provide a short list of the most common funding types below. Funding availability changes as a business grow and matures.
Personal Funds (bootstrapping)
Early stage (prototype, pre-revenue) businesses can be funded through the use of personal funds, the savings of a person or from drawing on personal credit, without recourse to others (no outside investors).
In certain countries, government incentive structures are in place that provide access to low-cost loans. In the UK, Start Up Loans of £500 to £25,000 are available from the government to start or grow a business.
The loans charge a fixed interest charge of 6% per year and is repayable over a 1 to 5 year period, and is only available to:
- applicants have to live in the UK
- applicants must be 18 or over
- applicants must have started (or plan to start) a UK-based business that’s been fully trading for less than 24-months.
Successful applicants can access 12-months free mentoring. But this is an unsecured personal loan, not a loan against the business. So needs to be paid out of after-tax money.
Small business grants
The UK government, local authorities and private organisations selectively provide funding and grant opportunities to small businesses.
Most of the grants include very specific eligibility requirements and can include time-consuming application processes.
Founders can work with incubators at idea the stage to network with other entrepreneurs, build on their idea, determine their market position and to get “investment-ready”.
Incubators sometimes make modest equity investments. Sizes are similar to a standard angel investment cheque (e.g. $20,000 to $150,00)
Accelerator programmes select certain founders and offer small seed investments. Investments can be used to fund research, product development, design, marketing and prototype improvement.
Some accelerators also offer mentorship, office space, networking opportunities, and even help with fundraising, in exchange for equity.
Although advice from industry experts and early investors can be very valuable, many businesses struggle when exiting accelerator programmes as they transition from the support they receive in the programme and seek to establish independence.
Crowdfunding platforms can either support founders through investment or via pre-sales. Founders can seek investment in the form of contributions from many individual investors, or use the platform to exchange rewards in exchange for capital.
Without the right approach and timing any amount of preparation and marketing might not be enough to run a successful crowdfunding campaign.
Individual investors, if they are not friends or family, are flatteringly called angels. These are wealthy individuals that invest in new businesses in return for equity stakes.
Business angels with industry experience and networks can add more value to business starters than the value of their investments.
Venture Capital Firms
New companies often fail. The success rate for new firms are only 23 percent (Harvard Business School study of USA firms). Business success hinges on a range of skills that need to combine in a constructive manner (financial, managerial, technical and commercial capabilities).
US venture capitalists (VCs) have found that 80% of their returns are generated by 20% of their investments. Many US VC firms only look at businesses that operate in very large addressable markets, that already have traction and that will give the VC employees a sense of comfort that they are capable of sustainably high growth.
VCs are particularly well positioned to help scale businesses across borders. Their networks, expertise and funding facilitates much easier cross-border expansion.
The right business starter funding
Outside money should NOT be your first option. The business starter gives up some control, the focus shifts to an exit (usually within three to five years) and what investors want (instead of what customers want), can be incredibly distracting (fundraising is difficult and draining) and when done at the wrong time (too early in the growth phase) can be at poor valuations .
There isn’t one funding solution that is right for everyone. Business starters need to consider their investment stage and how comfortable they are doing fundraising. With the right information, you can hunt in the right places and track down the right kind of funding.
Focus on increasing unit sales first, then decide what growth and capital requirements (if any) would work best to bring your product or service to those who would need it most, to bring your business to where it needs to be.
The best way to build something great is to do that through iterations. Don’t skimp on Quality. Remove layers of abstraction. Design, Build, Execute.