So, the wheels are finally in motion. Your new start-up business is moving ahead after months of planning, years of brainstorming and hours upon hours of work. Now it’s time to get serious. It’s time to talk financing.
You’ll be pleased to know that the statement ‘eight out of 10 start-ups fail’ is in fact a myth. According to statistics from the ‘US Bureau for Labor Statistics’ (Australian figures are not available), 50 percent of all new business make it to their fifth year and one third make it to a decade. However, the second highest reason for failure, cited by CBinsights, is running out of cash. Let’s crunch some numbers.
- Using savings
You may feel reluctant at first, but breaking open the piggy-bank can be a safe option; if you’re money smart. The question is, should you throw all your savings at your new business or edge the payments in slowly? While some entrepreneurs have made their millions by jumping straight into the deep end and going all-out with their savings, it doesn’t mean the same approach will work for you.
How much money you possess at your disposal, how much you can borrow, and leverage from personal savings are all important variables when it comes to tapping into your personal savings to fund your start-up.
- Family / friends
Similar to the above, this option carries equally great risks combined with additional motivation from the fear of failure. Approaching people you know often works at the idea stage of a start-up company, when a lack of revenue is equal to a lack of appeal.
Branching out from friends can lead to business contacts you may rarely get the opportunity to speak directly with, when personal assistants and secretaries sit in the way. However, putting a family member’s cashflow at risk is always a bold move. You must weigh the advantages and disadvantages.
- Angel investors
As heroic as they sound, angel investors could be your shining light. Often investing in small startups or entrepreneurs these investors can be within your list of family or friends. The capital angel investor can provide a one-time investment to propel your business forward or provide steady injections of cash over prolonged periods of time.
Offering more favourable conditions to other lenders, the angel’s are often a popular choice, according to angel equity: “Angel investors typically seek investment opportunities in seed, startup and early expansion stages. By becoming involved with companies that seek capital they add a resource of expertise in a variety of areas including sales, governance, senior management, international markets, technology, operations and finance.”
Since its formation in 1997, a lot has changed in the crowdfunding industry over the past 20 years. Now, crowdfunding can be easily used to raise capital from the Crowdfunding network of accredited investors. Crowdfunding allows start-ups to raise money in a variety of methods including debt, revenue share, convertible notes or equity.
The bonus is that whereas other initiatives take money from a percentage of the funds raised, sites like Crowdfunded have a set monthly fee which starts at under $299.
– The average successful crowdfunding campaign is $7,000
– The average campaign lasts 9 weeks
– Campaigns that can gain 30% of their goal within the first week are more likely to succeed
- Alternative finance options
Beyond the bank loan, there are a long lists of other viable finance options. Kickstarter options include CircleUp, EquityNet, Fundable, MicroVentures, Peerbackers, RocketHub, SmallKnot and SeedInvest; who all offer a variety of packages to start-ups at different costs.
Fintech, meaning computer programs and technology that is used to support banking and financial services, saw a huge increase in investment over the past seven years from $930 million to over $12 billion; although some experts are adamant Fintech is on the decline.
In Australia as a newly formed start-up it’s still unlikely that you can get finance. Shaun McGowan from Lend, a fintech business financing platform says “We need to see at least 6 months of trading history and revenue before we can assist.”
- Accelerator money
Accelerator money can come many forms, but is ultimately used to promote rapid growth in a short space of time – often a matter of months. In exchange, and after start-ups are accepted into a program, you obtain mentorship, office space and funding, in exchange for company stock.
It’s a quick-fire method to get the ball rolling, commonly at the sacrifice of equity. The good news however, is a survey from impact investor Unitus Seed Fund found that 13% of start-ups were funded six months after graduation from the accelerator program. In contrast, for accelerators, the percentage raised by 20%, and for start-ups graduating from hyper-accelerators, 71% of start-ups were funded six months after graduation.
- Venture capital
The two structures of venture capital are equity and convertible debt. Equity is the more common stock and, once invested, equity is owned outright unless there is a form of sale or liquidity. The second of the two, convertible debt, is a debt instrument that requires repayment.
According to The Finance Resource, in many venture capital deals, especially those related to technology, firms are expecting to receive 35% on their investment per year, if not higher. The Start-up receives, funding plus a wealth of business expertise, additional resources and connections. Analysis published in the Journal of International Financial Markets, Institutions, & Money found that venture capital investment made the biggest impact on start-ups with 5-19 employees.
- Being profitable from day one
It sounds pretty simple, and it is pretty simple. If you’re profitable from day one then you already have a leg-up on the competition and can expect a lot less stress when mapping out finances. Of course, it’s harder than it sounds, but many companies strike gold first time.
Take inspiration from ‘rand Content’, ‘Several nines’ and ‘Away With Tax’ to make profit from day one. Then again, if you’d rather take inspiration from Thomas Edison and you view failure as the path to success: “I have not failed. I’ve just found 10,000 ways that won’t work.” is a warming quote from Edison.
In summary, there are multiple options to fund start-ups.. Support ranges from that of family and friends to online crowdfunding experts or external companies. Weigh up the options, understand the risks AND rewards and carefully strategise the use of the capital funds going forward..
Eddie Baker is a freelance writer from Sydney Australia. He regularly participates in monetary policy debate and teaches business administration to budding entrepreneurs. Eddie has a passion for business and hopes to alleviate some of the daily challenges small business owners experience through his writings by sharing firsthand experience and advice learnt while teaching and studying business administration.