Looking beyond the banks for funding
Wednesday, November 24, 2010/
Cashflow is the lifeblood of any business. Without it a business cannot survive. The problem for start-ups is that the flow initially goes one way – out.
Cash “in” may not happen for some time, if at all. Combine this with a lack of trading history and the high risk of failure and you can see why traditional bank financing methods are generally not an option for most start ups.
To get funded, most start-ups need to look to alternative sources. These include professional investors such as venture capitalists and angel investors who provide funds in return for an ownership stake in your business, government grants and funding from your own sources including family and friends.
The reality is that there is only a limited amount of funding and only a minority of businesses end up getting access to it. There are however, some active steps you can take to improve your chances of being one of the funded few.
The first step is to build a realistic funding model that calculates how much cash is needed and when it is needed. Being capital efficient is the key here.
Getting more from your dollar will mean the business can go longer before it needs more cash again or before it becomes cashflow positive.
Be realistic with your estimate of cash required and always allow for the unexpected by having contingencies built in. It is a good idea to engage an accountant to help you develop your cashflow forecast.
The next step is to match the funding with available funding sources. At the start-up seed stage the main source of funds will be those available to you personally or sourced from family and friends. These funds can be used to get the company established, help develop the business plan and get some early traction.
Once you can demonstrate potential, you can then approach angel investors and venture capital funds to provide capital to help commercialise and grow the business.
These investors look for a high return to compensate for their high level of risk and will typically look to make three to 10 times their money over a five to seven-year period.
Angel investors are often a group of individuals that have come together to provide more moderate levels of cash, but a wealth of in-kind support through business skills, experience, knowledge and connections.
They typically invest at the seed or early stage of a start-up. In return, they are happier with more moderate returns on investment. In Australia there are a number of organised angel investment groups.
On the other hand, venture capital funds are larger organised investment vehicles that generally invest larger amounts at later stages. The typical venture capital investment occurs after the seed funding round (also referred to as Series A round) as growth funding in the interest of generating a significant return through an eventual exit, such as an IPO or trade sale of the company.
Before approaching angel investors or venture capital funds, you should put together a compelling business and investment proposition designed to grab their attention.
These types of investors are regularly looking at a large number of investment opportunities and only invest in those that have the potential for significant growth and returns. The two key factors they look at are the size of the opportunity and the quality of management.
Government grants can also be a useful source of funding for start-ups. Various Commonwealth and State Government departments offer grants programs to support different industries, stages of business and developmental activities.
There are grants available for research and development, early commercialisation and marketing activities, for hiring executives and for paying advisers to assist you with your business. However most grants require some level of funding contribution from the business and some are retrospective, meaning the money has to be spent first before you receive anything.
Whatever source of funds you seek, adopting a capital efficient approach will put you in a better position to obtain those funds and maximise their use, to the benefit of the business and its investors including you.
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises.