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Briefing: Start-up Funding Options

Any funding route is difficult - especially for a start-up with no proven track record or revenue generated by the vision you want to create. It’s difficult enough when you have these things. Add to this the inherent risk of investing through equity shares in a start-up and the picture becomes even more problematic.

The golden rule is whenever you are seeking funding clarify two essential questions first; 1) that you are absolutely clear about what you are doing with the money being raised (how much and where it will be spent) and, 2) why should an investor place their trust in you? Nail these two questions and you will be in a much better position when approaching the crowd for funding.

Like any investor the crowd essentially want to know:

·         Their capital will be returned

·         How much they stand to make on the deal

·         When?

The normal route to finding these answers is via the business plan. So being able to write a cohesive, coherent, concise and consistent document is fundamental to the start of this journey. In this plan the investor can see the outline of the business, the financial objectives and the accounting outcomes.

Before you approach a crowdfunding platform it might be an idea to get an independent person to look over the plan. Banks are one such source - if you ask them for money they will want to see the plan in its entirety. Banks will want to know what security you can offer against the loan.

If things go wrong they want to know that they can get at least some of the money back by taking possession and then disposing of these assets. Banks are also regulated with very tight bureaucracy and so the decision to lend or not can take some time to be reached.

A savvy business advisor will be able to tell you quite quickly if the business plan actually makes sense and if not then where the weaknesses in the plan are. Armed with a sound document you can now begin to approach equity crowdfunding platforms with an outline that will make sense to them and their audience.

Government backed schemes come in the form of awards or grants and these often have strings attached. For example if a local authority give you money to help build your marketing strategy, they may want you to stay in their jurisdiction for set period of time.

This is fine if you had no intention to move out of this jurisdiction in the first place but if you were planning a move three months after getting an award you may find you need to pay back the cash. Government backed schemes can also benefit your vision through publicity. They often want to promote the fact they have had the foresight to invest in a shiny new enterprise, especially one that is operating in a novel sector.

No matter the route you choose friends and family are still an important element to the funding mix, especially if you decide to crowdfund the vision. But relying on these for the total amount can be quite naïve on behalf of the entrepreneur. They may not have cash available at the time you need it, they may not want to invest in you or the project (but how do they tell you this without hurting the relationship?) or they may have other commitments that take priority at that time.

Either way relying too heavily on friends and family can create massive tensions that can negatively impact the business. Though they are needed in the campaign and although they might not be in a position to help you out financially they might be able to help spread the word about the project to their networks. Sometimes this is really helpful and can result in much broader networks becoming aware of the campaign.

Estimates of how much of the raise should come from these early funders range from 20 to 40 percent. But along with these individuals it is always a good idea to approach any high net worth (HNW) individuals in your network.

These HNWs might be business angels seeking to help a fledgling business get off the ground and spread its wings. Angels are different to friends and family as they are aware of the risks involved with such an investment and have probably been exposed to these before. In other words they know what they are potentially letting themselves in for.

They may also have been in the field or sector that you’re trying to penetrate. If this is the case then you have an even greater asset in your angel than you might realise - their network. This could be worth a tremendous amount to the campaign. In some instances more than the money the angel is investing.

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