Start-up businesses are often cited as the key to a healthy economy. Indeed, many entrepreneurs work hard to break into new sectors of the market, honing their product, their management and their new company to perfection. Despite this, though, many start-ups – particularly in the tech industry – struggle to attract that much-needed early capital necessary to get their business successfully up and running. This is due to a number of reasons: the macro-economy being a major one, which can affect investment at every level from bank loans to government schemes. If a company is looking to break particularly fresh new ground, initial investors may be hard to attract as they may be reluctant to take a risk.
Thankfully, there are variety of options for anyone looking to raise funds for a new business venture. Only you can tell which will be appropriate for your business, and by examining your options and the advantages and disadvantages of each option, you will gain a clearer idea of the next step your start-up company can take in securing early capital.
Seed money – friends and family
“Family and friends can be a good source of finance for your business, but it’s important to treat this type of funding as you would a formal finance deal.”
When you’re starting out, it is essential to secure some sort of early-stage capital or ‘seed money’ to get your start-up functioning as a business. This should be seen as a preliminary stage in a funding roadmap, and its function is really to make your business venture more attractive to other, wealthier investors.
One of the most common (and easiest) ways of getting early seed money is through ‘friends and family’ investment. This involves asking those personally close to you for funds. One advantage is that friends and family are often more accommodating and flexible than other investors: this could mean longer repayment schedules on loans than usual, or the investor not asking for security in exchange.
Although this might seem like an informal arrangement given your relationship to these investors, you must see them as exactly that: investors. This means you must formalise every step of friends and family investment, and treat these investors in a professional and business-like way. Failing to do so can harm not only your relationships with these people but your business as well.
Once you’ve secured some early stage capital and your business is up and running to the extent that it is attractive to other forms of investment, you can begin to look at attracting other forms of funding.
“A Business Angel investor uses his or her personal disposable finance and business or professional experience to invest in the growth of a small business, generally in start-up or early stage” (UK Business Angels Association).
Angel investment is perhaps one of the more well-known ways of securing early stage capital. It does, however, require much harder work than grants or friends/family. Angel investors are generally very experienced business people and are looking to see returns from their investment just as much as you are. This means your start-up venture has to demonstrate some true potential. However, once you have an angel investor on-board, his/her resources and experience can be invaluable.
Angel investors will expect ownership of a portion of the company, and will often provide you with invaluable advice and guidance through the start-up process and beyond. There are many different angel investor groups nationwide, such as the UK Business Angels Association and the Angel Investment Network. Make sure you do your research and try to best present your business in a way that ‘angels’ will find attractive.
Venture capital and private equity
Whereas a business angel is an individual investor using their own funds, venture capital comes from a common ‘fund’ using other investors’ money and is run by paid professionals. Venture capitalists raise this money by offering investors a place in the fund, which they can then see a return from once the fund is closed and the investments eventually sold. Because it can be seen as a ‘pooling’ of many different investors’ cash, the investment amount is likely to be much higher than that which you may receive from an ‘angel’.
However, venture capitalists will often demand a seat on your board of directors and some are more interested in already successful medium-sized businesses, rather than early-stage ventures.
Government schemes, bank loans and crowd funding
It can be tricky to attract venture capitalists or angel investors to your new venture, and, regardless, it’s important to try and attract funding from a variety of sources. There are hundreds of government schemes, including loans and grants, created specifically to help get new businesses up and running. These can be reliable, low-risk sources of investment. Such a scheme might also give your venture some additional early prestige, again strengthening your case with other future investors.
A relatively new form of capital funding known as reward-based crowd funding is particularly popular with tech start-ups. These can be easy and fast ways to gain perhaps all of the funds you need. It’s been popularised by sites such as Kickstarter, and there have been a number of success stories, such as the Cube 3D printer. However, attracting funds through this method often hinges on the creation of a specific product popular and innovative enough that consumers want to see it on the market. It may not be very effective if your company focuses on things like tech-based services rather than products.
Bank loans were traditionally seen as one of the first steps taken in securing growth capital. However, since the banking crisis, banks are less likely to loan new ventures substantial amounts of money, and they usually ask for considerable collateral or security in exchange for the loan. You should have a strong business plan to justify any investment in your business, whichever source you pursue and this includes a bank loan – a common reason for failing to secure bank financing is a weak business plan. Bank loans can be a secure source of investment and can be very useful to your business in the long-term, but acquiring a substantial bank loan could be harder for a start-up than seeking other forms of investment.
And finally, keep an eye on print and online media aimed at businesses and entrepreneurs as they sometimes run competitions to win funds to support new ventures. While entering such competitions takes time and effort, they provide lots of benefits. For example, they compel you to think hard about your business idea which in turn can help you hone your proposition. If you are among the lucky winners, you will benefit not only from the prize money (which usually comes without strings), you will also gain media exposure allowing you to promote your business to a much wider audience, including prospective investors and customers.
Ultimately, raising capital takes far longer than you might initially think, and it’s important to think of it as a multiple stage, or even continuous, process. Getting advice from someone you trust with suitable experience would be a good investment.