On a recent panel discussion at London South Bank University, I was asked what sources of funding were available for new businesses. Funding has changed and options have expanded greatly in recent years, so I thought I’d document it here for anyone interested.
This is just a short list. There is a lot of detail under each, so over the next few weeks I will do an article on each. What you have here is just a short summary.
First, I am going to divide this into 3 sections, because there are three basic ways of getting money for your business:
Each involves a sale. The sale is just different for each. You have to give something away be it interest, share of business, or product
Each has a price. The more risk you are asking your funder to take, the higher that price iyou will pay. We discuss this in the timing section below
A loan can come from a bank, a credit card, your parents or friends. Interest is normally charged that can be set off against tax. Any formal loan (as opposed to ‘Bank of Mum and Dad’) will involve some form of guarantee. If your business is young and has no assets, that will mean they will be looking to you to guarantee the loan. If things go wrong, you will be liable.
This is when someone buys a part of your company in return for cash you invest in the business. The riskier your company (and a young company is always risky) the less money you will get and the larger share of the company will be asked for in return. Investment might come from an Angel investor, Venture Capitalist or Private Equity as just three examples. Type of investment tends to vary by how young and risky your company is. Angels, for example, are early stage investors and give relatively small amounts of money for relatively large slices of your company because you are risky.
Customer funding at its simplest is getting payment in advance, guaranteeing a market and getting the case before you pay any costs. Some businesses suit this more than others. For example, a new aluminium smelter would have a hard time getting it’s customers to pay for 20 years’ worth of aluminium up front to pay for the build costs! However, in London a lot of construction is paid for or at least guaranteed by people putting down deposits and arranging mortgages before new properties are built. Training companies routinely ask for money in advance, on booking. Sports season ticket holders pay at the start of the season. And Crowdfunding is a newer example, where product is promised when it is ready. This sort of funding will likely need you to follow a ‘bootstrapping’ or ‘lean start up’ approach to starting your business.
What is really important for you to consider is the timing of your investment needs. An entrepreneurial idea at its inception has a very high risk and low valuation. This means that debt will be harder to come by and equity is more expensive, i.e. you have to give a large share of ownership to fund the business. Reducing the riskiness and increasing the value of you enterprise can be achieved through a series of carefully planned steps that goes from idea to proof of concept, proof of product, proof of revenue, proof of growth potential nad proof of profit.
This diagram may help understand the journey
There are ways to mitigate this and how you achieve this is unique to your business enterprise and we work with entrepreneurs to carefully plan these steps using bootstrapping, lean approaches and customer funded models.
We do this exercise as part of our entrepreneurship teaching and come and have a look at our courses. If you are considering starting your business as an alternative to your current work, come and learn from best instructors in this business. Taught by executive education and entrepreneurial faculty from London Business School you can either
Crafting Your Entrepreneurial Opportunity
A one day Start-up bootcamp to create, refine and take the risk out of your new business idea
You should consider this if…
You are evaluating starting your own business, not sure of your idea and whether entrepreneurship is you best choice outside of employment
Developing your Entrepreneurial Business
A once a week, 8 week staged journey to convert your idea to a real business
You should consider this if…
You have a business idea, and are keen to develop it into a business by focusing on the right set of customers, develop the product that is the right fit for the market and its paying customers. And you want to do so by avoiding the most common mistakes naive entrepreneurs make.
Held in London, the 1-day bootcamp and 8-week workshop have been designed for working professionals, and delivered by faculty who have not only helped grow businesses at King’s College London, London Business School, UCL, LSBU (Entrepreneurial University of the Year, 2016) in the UK and also a number of universities, institutions, and governments abroad.