Many entrepreneurs believe they’ve got a great idea but are hamstrung in getting the project off the ground because they don’t know how to find funding.
By taking steps in critical areas like market research, understanding the (realistic) scale of the opportunity, having a water tight business model and a comprehensive business plan, you can improve your odds of finding funding.
How to find funding: Where to look
Self-funding is the simplest way to kick-start your new venture. The catch of course is whether you have the funds in the first place to invest. Fortunately by bootstrapping a business and reducing as much excess expenditure as possible it could take a lot less money than you think to fund your business.
The advantage of this strategy is that you maintain full control and ownership of the venture. A word of caution though: If you have an asset like a house, you may be able to borrow against it. The risk however, is that if the business doesn’t work and you’re unable to make the repayments, you could lose your house.
Resource: 9 Different Kinds Of SME Funding
Branching out from self-funding is bootstrapping. This means that by reducing your expenditure to the bare minimum (which can also mean forgoing your salary for a time) and selling unnecessary assets, that the business will be able to fund itself as it grows and develops.
In getting funding, you will need to meet strict criteria as they are unlikely to finance a high risk venture or someone with a poor history of debt management. Due to unstable global economics, banks are also unlikely to finance a start-up as they are perceived to be high risk. On the plus side, the current interest rate cut means that it’s cheaper than ever to repay a loan.
If you don’t want to go via a bank for finance, you can investigate different forms of investors. These include angel investors who are individuals prepared to offer funds to a budding entrepreneur in exchange for a return on investment. The alternative is venture capitalists.
These are private firms that invest in high return ventures but require an equity stake in exchange for their funding. They also require adherence to the business plan and progress milestones must be met. If the business doesn’t live up to expectations the venture capitalist can liquidate the company to recover costs.
A variation of angel funding and venture capitalists is crowd funding. This is a group of individuals who contribute small amounts of money and collectively invest in a business venture. Like venture capitalists crowd funding receives equity in the business.
Related: How to Write a Funding Proposal
How to find finding: Pleasing your investors
- Get it right. When pitching to investors make sure you know all aspects of the business, the products or services, its place in the market and the industry it operates in. If possible, have the product or service out in the market before approaching investors as they would rather see real data than speculative data.
- Have the background. Investors want to know that they’re putting their money in a good venture. Have the relevant skills, experience, management skills and knowledge to give them the confidence they need to invest. This also means having good understanding of your competition.
- Demonstrate a need. It’s all well and good having a great idea that is unique in its offering, but if there is no market there is no business.
- Return on investment. Angel investors aside, the majority of investors will want a good return for their risk. Be realistic (erring on the side of caution) with your financial projections showing how long it will take to break-even, turn a profit and repay funds. Included in your pitch should be a clear exit strategy so they can cash in and move on. Most investors are savvy business people and they’ll smell a rat a mile off, so don’t ever lie.
Related: New Ways SMEs Can Find Funding