Considerations when raising business finance
Raising finance can be key for the growth of any business or startup. With covid in the air and the number of new businesses formed reaching a new record in 2020, the conversations of business funding are hot on many people’s lips.
If you are looking to penetrate an industry and gain market share, many believe that this cannot be done without funding - especially if you are looking at building apps or software.
With less than 1% of US startups receiving funding from venture capitalists and 77% of small businesses relying on their savings, there are a number of things to consider when raising finance.
Understanding Your Costs, Profits and Forecasts
The first thing that any investor typically looks at is your current financial position and what you can achieve with funding.
A lot of investors will have financial backgrounds and sometimes the decision to invest is a numbers game.
Being extremely thorough with your costs, revenue and forecasts is essential, being able to justify any revenue made so far and what you can expect after years 1,2,3 and even 5.
Where do your major costs lie? Is it in equipment, tech or marketing? Can you achieve economies of scale and save money with large purchases?
If you are pre-revenue, you may need to also demonstrate demand for your product, through testing it with sample customers and building real case studies to show its potential value.
If you are generating income, you ideally need to show noticeable growth, whether it is month-on-month, quarter-on-quarter or year-on-year. For instance, if you can demonstrate 20% growth each month, this is certainly going to get the attention of investors.
The Type of Finance You Require
VC funding might sound glamorous, but this is just one of the many options when it comes to funding a business. In addition to VC funding, you have angel investors, startup loans, business loans, banks loans, government grants, crowdfunding platforms, specialist finance and even borrowing from family and friends.
As a business owner, you may need to decide what path and responsibilities you want. If you like running your own ideas and not having superiors to answer to, then using loans or angels might be a better suit for your personality.
However, if you feel that raising large sums is the only way to get your business off the ground, you may need to work with more institutional investors or VCs to help you get there - even if it means having someone to report to.
This may also depend on your industry, since working in sustainability or R&D is a very hot topic and could give you access to government grants which are free and encourage you to grow and develop.
How Much Equity Are You Giving Up?
Where possible, you probably want to avoid giving up equity, unless you feel that you have to raise tens and tens of millions of pounds or dollars to get there. In which case, owning only 5% or 10% of your business is not a bad thing if the company now has a huge valuation.
But if you want to avoid giving up equity, consider looking at some of the funding options that do not require this, including the use of your own savings, personal or business loans, grants or schemes where you can borrow money just for marketing. There are now a number of schemes that offer loans to using Google Ads and Social Media ads including from MMC Ventures, Outfund and ClearCo.
Some types of funding are short-term, meaning that it is not necessarily worth giving up equity for if you only need a cash injection for a few months. In this case, you might look at using secured loans, bridging loans, personal guarantees or bank loans to give you that quick boost.
Can You Trade Without Funding?
The real question begs is whether your business needs funding at all.
“Having large funding certainly adds social status and a validation of your business,” explains Dan Kettle, founder of online finance company Pheabs.
“But there is the other side of the coin that argues that funding can add a lot of extra pressure to deliver for your investors and may prevent you from being able to change your business or explore other opportunities.”
“There is also a lot to be said about running a very lean business, with very low running costs and overheads. Whether it is Apple which started with just 4 people in a garage or global whiskey brand Macallan, which only has 6 staff.