FINANCING a start-up is one of the hardest challenges facing any budding
entrepreneur, and with the credit crunch it is unlikely to get any easier.
Cash-strapped banks are even more reluctant to lend money until a business has
a trading record. Using a credit card, remortgaging your home or relying on
your spouse’s job to subsidise you while you toil away on the new business
are also becoming harder as interest rates stay high and the cost of living
rises.
Working out ways to spend as little as possible in the early days is perhaps
the most important thing any would-be entrepreneur can do, said Stuart Lynn
of Sage, the business software and services firm. “Managing your start-up
costs intelligently can make a huge difference to how much you need to get
the business on its feet.
“Work out what you have to spend now and what you can defer until you start
seeing some return on your initial investment. A good plan with sensible
timelines and costings can make all the difference. A lot of the start-ups
we speak to have no idea of the costs that will be involved in the business
after the first year and that’s when it is often too late.”
Once you have started placing your first orders from suppliers and making your
first sales there are several ways to keep costs down, said Lynn. “Build
good relationships with your suppliers to get longer payment terms or
discounts for buying in bulk. Asking customers for part-payment upfront is
another good way to stay on an even keel.
“A lot of businesses fail to do a credit check on their customers. A few
non-payments can quickly put you out of business. Another common mistake for
new businesses is taking on more work than they can finance and then getting
into problems delivering the goods.”
Establishing some discipline and using software that enables you to keep a
close eye on your cash flow can prevent you from overtrading or getting into
trouble. “Keep on top of your invoicing and your bills as well,” said Lynn.
“It’s amazing how many businesses still trade out of a shoebox that they send
to their accountant every three months. It’s a sure way to find out you are
£10,000 in the red just when you don’t expect it.”
For businesses that need seed capital or cannot fund growth from existing
sales, angel and venture-capital investors can provide significant amounts
of money if you are prepared to give away a chunk of equity in the business.
Getting them to invest is hard, however. Only a tiny percentage of pitches to
venture capitalists and angels ever get funded, so getting your business
plan and your pitch right is important, said Bill Morrow, founder of
Angelsden.co.uk, which aims to match investors and businesses.
“The companies that get funding are the ones that spell out their plans and
ideas in simple terms, that have a team of people behind them with a proven
track record and that can justify their plans and projections rather than
just making assumptions.”
Seeking equity investment, rather than a business loan, is not something to be
done lightly, but if you find the right backers, the value they can help you
create can be worth it, said James Uffindell, founder of Bright London,
which helps high-flying graduates find good careers. Uffindell recently
secured a six-figure sum from an angel investor who brings valuable
experience to the business.
Securing equity backing is hard work, said Uffindell. “The amount of legal
work I went through was a lot more than I anticipated. You also have to make
it very clear what you want the money for and how you are going to spend it.
You need to be able to tell them you need to spend this much to chase this
many leads to get this number of sales,” he said.
“You have to make sure you choose the right backer too. I have started a
business before so I wanted someone who would let me get on with it but who
had commercial acumen and could help me get the best out of any deal I do.”
Miles Cheetham is one of the founding partners of the Key Revolution, a
start-up that has just launched a mobile data service called Mobiu. He said
that securing the right venture-capital and angel finance is often about
more than just the money. “We spent a fair amount of time looking for the
right investor. You need to make sure your investors are in it for more than
just the money; that they have the right experience and enthusiasm for your
business.”
Cheetham and his fellow founders secured the seed capital they needed from an
angel investor. They obtained a second round of funding from Octopus
Ventures, which invests small amounts of venture funding ranging from
£250,000 to £2m.
“Our original investor, Peter Bamford, brought loads of experience from the
mobile-phone world. Octopus also opens doors for us, offers advice and has
valuable contacts with retailers. It helps with really practical day-to-day
stuff.”
The problem with beginning the search for investors is knowing where to look,
said Cheetham. “Get the right advice and get it early. There are some great
agencies out there. I am a big fan of some of the schemes supported by the
Regional Development Agencies and local schemes like the Thames Valley
Economic Partnership and the Newbury Enterprise Hub.”
Getting good advice is no substitute for the hard work involved in finding the
right investors, said Cheetham. “Hard work, long hours and lots of meetings
are unavoidable. It’s about knocking on every door, getting referrals and
getting through to the people who have money to invest.”
