One of the key challenges faced by entrepreneurs is financing the development of their idea from concept through to execution. This is especially true if you have no track record of starting businesses, know few HNWI’s, or have a limited professional network.
In this article we will look into how anyone with an idea can finance his, or her business through its initial stages.
Many are dependent upon certain factors, others reliant upon your own finances. In fact, prepare yourself, whilst there is no silver bullet, you do have options
Below is a brief list of 16 potential options, complete with some notes I have made over the course of setting up businesses both in the UK and in Australia.
Crowdfunding is the use of small amounts of capital raised from a large number of individuals to finance a new business venture. Often, the individuals are incentivised by the business to give money to the project and/or business by offering a pre-release version of the product, discount rates, lifetime rates, business updates, or just simple recognition.
Kickstarter, Indiegogo, GoFundMe are good examples of popular crowdfunding platforms, with active communities and reach.
Caveat, although it has many key advantages, a crowdfunding campaign can eat into a huge amount of your time and energy.
Similar in almost every way to regular crowdfunding, Equity-based crowdfunding enables you to raise capital by enabling people to buy shares in your business.
An angel investor is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the initial moments and when most investors are not prepared to back them.
Angel investors are also often known as a private investor, or seed investor, or business angel are high net worth individuals (HNWI’s), or ultra-high net worth individuals (UHNWI’s) who offer financial backing and often a form of mentorship to NewCo’s and start-up entrepreneurs in exchange for a percentage of ownership in the venture.
FRIENDS AND FAMILY
Raising money from friends and family is one of the most common methods that new entrepreneurs fund their start-ups. This has many positives, but also a few notable negatives, namely that you could endanger your relationship with the individuals involved.
Venture capitalists are investors that provide capital to businesses exhibiting great potential for ROI. Like an Angel investor, they do this in exchange for a percentage ownership of the business entity. Venture capitalists (VC’s) are willing to risk investing in businesses because they can earn a substantial return on their outlay if the business is a success. Due to the nature of the gamble, venture capitalists often experience high rates of failure due to the uncertainty that is involved with new and unproven companies. It is very much a percentage game so tend to
The various ways and methods of attracting investment from VC’s differs depending upon the segment you are planning to operate in. For instance, with an average seed of a round of $500K, start-ups with science-intensive R&D at this stage can yield $2-3M.
Start-ups within the healthcare, pharmaceutical and biotechnology verticals tend to require a more thorough approach to product development and therefore more investment.
It goes without saying that start-ups requiring less proprietary product development will have different bars.
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GOVERNMENT GRANTS AND LOANS
Government grants covering everything from research and development, product development through to exporting and employment can often be sourced from local, State and federal governments here in Australia. If you are located in the UK, or US then it is worth looking investigating similar grants and loans.
All government entities have different requirements and caveats for businesses applying for them. These can be bewildering at times. In order to maximise your potential then it would be worth talking to one of the many local experts in the field. They will often do the submissions for you and guide you through the entire process.
A Start-up Incubator, sometimes known as Business Incubator, or just Incubator is a company that helps NewCo’s and start-up businesses to develop by providing a range of business assistance services, including training and mentoring, through to office space and certain back-office services such as payroll.
Start-up accelerators are fixed-term programs that include both mentorship and a variety of training and networking components designed to better prepare the entrepreneur and NewCo for the business ecosystem. The program culminates in a demonstration of the product, or a pitch to a group of potential investors.
An initial coin offering, sometimes alternatively called an initial currency offering is a method of raising capital using cryptocurrencies.
Investors buy into the offering and receive a token issued by the company. This token will then represent a stake in the company.
Initial exchange offering is a popular new variant on initial coin offering (ICO). The main difference being that the IEO is operated directly by cryptocurrency exchanges.
A lot of new digital-only businesses are built and launched by the founders self-funding their enterprise. This method, which is often referred to as ‘Bootstrapping’ enables the entrepreneur hold on to the maximum amount of shares in the business. The shareholding is not diluted by other parties becoming involved.
Microfinance, also known as micro-loans allow people to get small business loans in a manner that is consistent with ethical lending practices.
If your start-up only needs to raise a small amount of money then a micro-loan could be a useful way of funding your business. Micro-loans are normally quite small, topping out at about $5,000. An example of a platform offering micro-loans is Wallet Wizard.
There are many competitions for founders looking to start a business.
For example, business plan competitions let you share your business idea with industry professionals, receive feedback and may even see you win some prize money.
If you need to raise capital perhaps you could sell something. Most possessions have a value attached to them both in terms of financial and sentiment. Decide if you have something you no longer want and use its value to acquire additional capital.
While it can be frustratingly difficult to find a suitable lender for your NewCo, or start-up, it’s not impossible to obtain a business loan. Banks do not like risk, so the lender will look at your credit score, the business credit score and a number of additional factors when deciding upon whether to offer a loan.
With the high interest rates and limited amount of credit available, using a personal credit card to fund your business is never going to be a good idea and is very much a means of last resort. Wherever possible always separate your money from that of your business.
The list provided here is not exhaustive, yet offers some insight into the likely sources of funding you will potentially garner.
As mentioned at the very beginning of the article, raising capital to start the business is almost as difficult as operating and growing the business. Much thought needs to be given as to how much capital you need to (1) build the business; and (2) support yourself and your family.
Remember, in whatever the number your business plan states, the number is probably going to be higher.
Tip 1: Take into account your own expenses. Do not underestimate your requirements.
Tip 2: Add a decent amount of flexibility to the budget. You will likely need it. Do not underestimate the costs to the business… and (importantly) the timing of the costs. Cash flow needs to be forecasted and understood properly.
Tip 3: Visualise the ownership of your business. Understand corporate governance and mitigate risk to both yourself and the business as best you can.