How to raise money as a start-up
One of the greatest challenges for any entrepreneur starting their own small business is to ensure they have enough money to turn their dream into reality by means of getting enough capital behind them to start trading.
The term ‘capital’ in this sense, relates to the amount of money required to launch the business and take it from an idea into motion. Funding your business idea and getting it off the ground is both an art and a science; yet sometimes we lose our head due to the financial pressure of having to buy stock, premises rental, purchasing equipment or even company registration.
At times, it can feel like we needed to do everything yesterday and that our success is being strangled due to a lack of funds or adequate cash flow.
There are two arguments when it comes to startup capital; on the one hand it pays to be conservative in your financial requirements as the less you require to raise, the more likely you are to achieve that amount – particularly if looking to borrow money from a bank, friends and family, or get investment through external stakeholders.
However, on the other hand, one of the main reasons small businesses fail is due to them running into cash flow problems and a huge component of these problems are due to startups being underfunded… and therefore not able to keep their head above water in the month-to-month running of the business.
Raising capital is rarely an easy task, and for many entrepreneurs, it can be a scary process – going before a panel of investors and being grilled about their business, for example… or even securing a business loan on their house, whilst it circumvents the need to “sing for their supper” in the sense of convincing investors – it now makes their world very unstable, given that they now have the security of their own home riding on their business being a success.
Entrepreneurs can face immense emotional pressure and work very long hours; all the time knowing the odds are heavily stacked against them… but that’s what makes an entrepreneur an entrepreneur is their determined spirit; they are risk takers, they are modern-day explorers and voyagers found in ancient times; setting off on journeys into stormy and perilous seas in pursuit of discovering great new riches.
However, without capital behind them, the chances of them even getting out the harbour are incredibly slim. This article offers three suggestions to think about when raising capital:
Get a business loan
The most traditional route for setting up a small business is to get a small business loan from a finance company such as a traditional bank. This is possibly one of the easiest, reliable, and independent ways of financing your business.
You keep complete control of your company, as you aren’t having to offer equity to external investors, who each get a say in how your company is run – and convincing one person, is a whole lot easier than going around investor meetings.
Friends and family
In many ways, the ideal place to look for financing your start-up is your own savings account – however, there’s a good chance your savings will already be depleted if you’re some way down the road of turning your entrepreneurial dream into reality – meaning, you might have to turn to friends and family for a little support.
If you have wealthy friends and family who are open to backing your business for a small incentive (such as interest on the loan or equity in the business) this can be a great option, as it will cost less and be easier to arrange than commercial financing; however, borrowing money from friends and family can be a very stressful experience that totally changes (and sometimes annihilates) friendships. It might be worth considering the potential strain put on your friendships should the business not turn out to be a success.
The other factor to consider here is that we often end up giving away much more equity in the early stages, to friends and family, than we would a commercial investor. In part, this is out of politeness or perhaps an element of generosity due to feeling so desperate… yet, oftentimes, in later funding rounds with serious investors, it can cause a huge problem if your cousin who has little involvement with the business wishes to retain 30 per cent for the $10k they put up front.
A recent trend in raising startup capital is that of crowdfunding; where you pitch your idea on an online platform such as www.crowdfunding.com and strangers can offer bits of cash to back your idea – but these ‘bits of cash’ can accumulate to several million dollars.
Crowdfunding sites are particularly good if your project has an element of social value about it, not that it has to be a non-profit social enterprise… but a sense of “giving back” as people are keen to back projects with a compelling social story. Think of TOM’s for example, who operate a policy of donating a pair of their shoes to impoverished communities for each pair that is sold. This hooks people in, and stimulates the heart and mind of people that go on to share the concept – and this is where crowdfunding can be exceptionally powerful; when the campaign goes viral.
The core advice, with crowdfunding, therefore, is to make it more about the story behind your brand and the value that you’re providing in the sense of your mission – rather than the bottom line financial forecasts. People want to be involved with something that can emotionally connect to, on this platform, not just something to invest in financially.
In summary, you have three main options; raise money from a commercial source such as a bank, raise money from friends and family, or raise money via crowdfunding. Whatever route you decide to go down just make sure that your cash flow projections are realistic and that you are asking for as much as you actually need.