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.