Funding a business start-up can seem daunting – but it needn’t be. Providing you have the essential building blocks in place, there are more funding opportunities now than ever before, thanks to equity investors and crowdfunding.
Twenty years ago your options were largely limited to bank loans that were not only incredibly hard to come by, but if you did manage to make a convincing case, usually involved putting your house on the line as collateral.
Now private equity investors – either in the shape of investment companies or wealthy business angels – offer the opportunity to scale up your business with a substantial cash investment.
Giving up equity
There is always a catch. In this case, it involves you surrendering some equity in your business. That can be hard when you have put your heart and soul into making your dream a reality.
Starting your own business is a little like giving birth. You will have endured months of burning the midnight oil, often while holding down a day job.
You will have been researching the market, refining your unique selling point (USP) and assembling the building blocks, whether that be sourcing your product or finding staff for your service offering.
Then the big day: the launch, with all the birth pangs that go with that – followed by months of nurturing as you grow the business.
Just the thought of handing over up to half your fledgling new venture to a complete stranger can be gut-wrenching. But think of it this way: would you rather own 100% of not very much, or 51% of a highly profitable business? (Always avoid surrendering control if at all possible.)
It’s hard to grow a business beyond the early stages without a significant cash input.
The risks are that you will forever stay as what they call in the US a ‘mom and pop’ operation, unable to reach the critical mass you need to break through – or worst still, a big competitor sees what you’re doing and moves into your territory.
Proof of concept
It’s worth mentioning that it’s very, very hard to get funding for a business that is purely at the idea stage.
Unless you’re another Mark Zuckerberg with a revolutionary idea, the chances of getting a ‘bite’ are next to zero – even Zuckerberg started Facebook as a social platform for his fellow students at university.
Potential investors will want proof of concept. They will expect to see that you’ve put your own time and money into trialling your business idea, and will want hard financial data in terms of sales, turnover and profit margin.
Follow the money
Private equity investment comes in two main flavours – venture capital, and business angel investors.
Venture capital (VC) is used to refer to companies that raise funds to invest in start-ups and small and medium-size enterprises (SMEs).
Their aim is to identify and invest in companies and entrepreneurs with a strong USP, that have identified a niche in the market, and increasingly in this tech age, offer the chance to disrupt established business models.
As well as making a cash injection, they will have contacts who will be able to help grow the business more rapidly. However, they are more risk averse than angel investors, and tend to invest in bigger start-ups that have already gained significant traction in the market.
They will also require a seat on the board.
Angel investors are high net worth individuals – often entrepreneurs who have successfully grown their own businesses – who like to invest directly in new start-ups.
While they are most definitely looking for a financial return, many also enjoy the challenge of growing a new business, and may offer to get involved with hands-on help and advice.
This kind of investor can be invaluable, providing the skills, experience and expertise that a new business owner is often desperately lacking.
Having expert advice from someone who is aware of potential pitfalls, as well as helping you to capitalise on growth opportunities, can be a real game-changer.
Again, as with a venture capital company, an angel will have a contacts book full of names of people who can help scale up your business.
Finding your investor
So how do you find your business angel or VC company? If you like the limelight you could always apply to take part in BBC TV’s Dragons’ Den.
However, while the TV exposure can be a huge boost, there are plenty of less painful ways to find potential suitors. Websites such as the Angel Investment Network offer you the chance to post your pitch and connect with thousands of potential investors.
The UK Business Angels Association also offers a wealth of help and advice, together with access to a directory of angels.
Last, and by no means least, there is another potential source of investment: crowdfunding.
Crowdfunding is a revolutionary and increasingly popular way of raising funds for a start-up, where individual members of the public can use a website such as crowdcube or Funding Circle to pledge cash in exchange for shares in your business.
Leading craft brewer BrewDog – makers of iconic brands such as Punk IPA – raised £3.1m from 1,888 backers to expand from its Scottish base and launch its products around the world.
While you’re searching for your investor, it’s also worth hooking up with other entrepreneurs at networking events organised by groups such as Silicon Drinkabout and Startupgrind.
Whether it’s looking to see if you have synergies – shared ambitions and opportunities – where you could help each other, or just sharing inspiration and frustrations, it’s good to know you’re not alone.
Some groups also offer showcase events that give business owners that chance to meet and greet potential investors.