There are many ways to fund a business, particularly when entrepreneurs by their very nature are so resourceful. Below we have outlined the most common methods.
It is important to carefully consider the stage your business is at, when you are looking at which method of funding might suit you. Businesses at the very early stage for example, will need to establish some proof points before they could even consider going out to external parties. At the other end of the spectrum, businesses that are revenue generating, will generally have no trouble attracting external funds.
The main thing you need to consider is the price of funding. In other words, are you happy to pay x% to service a debt, or would you prefer to sell x% of your business, thereby potentially giving away some of your control? It’s all a balancing act and there is never a one-size-fits-all approach. Funding a business ultimately comes down to the needs of the business, the entrepreneur and the investors. When all three needs align, funding can be achieved. When they don’t then finding important funds for your business can be an extremely difficult.
- Bootstrapping– Starting/running a business without external help, funded by your own personal resources. This is a high personal risk although brave and admirable and viewed by potential investors as a vital proof point in terms of an entrepreneur’s self-belief and belief in their business.
- Friend & family funding– Since before 200BC small businesses have been supported and funded by family and friends. As our culture becomes more individualistic and isolated, friends and family are hardly our closest bet for funding. While it is positive to have family and friends invest in you, the potential stress of disappointment is ever present. It is important to set clear expectations for the funding members, or else feuds and un-pleasantries could arise within friendships and relationships.
- Crowdfunding– This is a tool to generate ‘small’ money from a large pool of people. Crowdfunding has seen many startups, campaigns and small businesses given a new breath of life. Businesses often see this funding structure as a predominantly Tech-heavy platform that is challenging to enter. The reality is quite different, with the tech side of platforms making investment onto early-stage businesses, simple and seamless.
- Angel funding– This funding structure is about tapping in to the funds of high net worth individuals with high liquidity. These are generally highly successful business people who represent or own mature business models or are established as individuals in their sector, with an interest in supporting growing businesses in sectors they feel strongly about. A positive side to this source of funding is that the individual often becomes involved as a mentor to your venture, hence the ‘Angel’ terminology. Watch that space however – sometimes these Angels can become the devil in disguise and have other plans for your business. Be careful whom you partner up with, as some may try reach in for more executive power than you were willing to allow.
- Venture Capital & Investment– This is playing with the big boys. VC funding is joining up with an individual or companies who have a mandate of investing in long term return opportunities – hence the usually large chunks of equity they require in return for their funding. There are also usually stipulations for VC’s to sit on Boards, as many wish to be actively involved in the key decision making processes for the business.
Whatever funding route you decide to choose, please remember the following simple truths:
- Funding will take longer than you anticipate – bargain on 6 to 18 months.
- Funnel your approach Smart and not Hard – it leads to a better conversion rate.
- Take risks and don’t be afraid to move your target amount up – what do you have to lose?
- Have in mind a funding plan that takes you well beyond revenue generation.
- Platforms make the funding journey a lot easier, with their automation and regulation.