We’ve been hearing more and more about the problems startups are having with finance and funding. Last week, we looked at what startups actually spend their money on. Following on from that, this week we’re going to explore the various avenues and sources of finance. However, before you start sourcing funding, make sure you definitely need it. It is quite important to sit down, talk out what it’s for, how much you require etc. If you go out and seek investment when you don’t need it, the consequences could potentially upend your business.
Right, so let’s look at the options.
At the top of our list is one of the most obvious, self-financing. Whether you plan on going the whole 9 yards via personal savings or seeking outside investment, you will initially be spending your own money. There is little alternative to this, many financiers are of the view that you should put your money where your mouth is: why would I give you my money when you don’t believe in your own business enough to invest in it yourself? The goal would be, with a bit of luck you can get your company up and running from your personal savings. Then hopefully cash flow will keep you financed as you watch business growth skyrocket, with little or no debt. This is the ideal way to start a business, but sadly (as with a lot of ideals) it doesn’t always work out like this.
Government funding is an avenue always worth considering. With the economic slump the government have been increasing funding for new entrepreneurial companies. This is an aspect all startups should research even if it’s just to see if you qualify. We plan on running a piece on how to go about securing up to €100,000 from the Irish government in the coming weeks, if you need in-depth information at the moment on grants and funding, check out Enterprise Ireland’s website.
Another external source of financing is one which may surprise you. Credit cards are one of the most overused sources of finance. Although one may expect firms using credit cards for small loans; these firms can be more likely to fail, if not managed properly. Despite this, treat it like any other loan and as long as you stay on top of repayments there is no reason why it can’t get you out of a few cash-tight corners. Just check out Cisco or Google’s startup stories!
Next on the list is asking Mum, Dad and extended family. It is definitely something to consider and can help you through dry spells, but comes with a health warning. Family owned businesses can be a messy affair. While there are success stories, there is also a muddle of debt ridden and beleaguering families with failed businesses. Money does strange things to people and if your company doesn’t turn out to be all that you hoped it to be, you may find yourself cooking for one this Christmas.
Bank loans are lower down the list and the main reason for that is banks will give you all the funding you need, as long as you don’t need it. Banks will happily approve your loan once you have secured assets to back up the application and startups just don’t have this. This can make things tricky for SMEs but there are methods to get banks on board, such as Ulster Bank’s “Business Start-Up” package. There is also increasing downward pressure from the government to start lending, specifically to businesses within Ireland, so hopefully we’ll see lending figures rise in the coming months.
To break this down into the main sub categories, we have 3 types of investors:
- Accelerator programs such as Ycombinator. Typically investing around €15,000 for between 10%-15%
- Angel investors: Come on board at a very early stage and can invest tend to invest between €20,000-€200,000, equity wise this will depend on your business at their time of entry
- Venture Capitals: Coming on toward the later stages: Can invest anything usually upwards of €1,000,000 to depending on the company hundreds of millions. They will tend to try direct your company towards an exit either via going public or M&A.
The Venture Capitalists is an avenue that gets a lot of the limelight. However, VCs don’t do as much investing in startups as is generally thought, despite the heavy media coverage. That isn’t to say that it VCs aren’t a viable option for your business. With VCs, there are two things to keep in mind: 1) They are essentially sectors of larger corporate (usually investment) firms that provide capital to “early-stage, high-potential, high risk, growth startups” and 2) They will look for a large equity share diluting your control over the company. Some of the big guns in the business, which you may have already heard of, are the likes of Goldman Sachs, Intel Capital (of Intel) and Polaris Ventures. Polaris in particular have a large global scene, but also maintain a strong presence in Ireland, if you are seeking information on VCs in Ireland follow the link here. Keep the idea of angel investors in mind, however, as they can be a very valuable asset to have on board. They do tend to play a big role in the company: advising; helping you make connections, etc. We will talk about all three types of investors in a future blog post, but for now check out SmallBusinessCan’s blog piece on angels and Ycombinator’s website.