There’s an old adage when it comes to business that you have to spend money in order to make money. Whether you are looking to buy stock or simply get your work from home website up of the ground, you will need to find some kind of investment in order to get your business running.
There are, of course, many types of business that don’t require funding in a traditional sense. Any business in which your time is the major commodity requires only an investment of hours. Even still, you may require external investment to support the period of time that you need to give to your business before the money starts coming in.
In the middle of a recession, it would be natural to think that investment is difficult to find. However, with the growth of crowd funding services such as Kickstarter, getting the money that you need to start your own business is potentially easier than ever.
The First Steps of Funding
One of the most common problems that every entrepreneur faces is underestimating how much funding is required. Equally, it is important to be careful not to overestimate, making your target amount an achievable goal.
A good first step towards estimating and obtaining the funding that you need is working out exactly how your money will be spent. This is where a business plan or investment proposal comes into play.
Without experience, writing an entire business plan can seem like an impossible task. However, there is a great deal of content online that can help you to get started. Business Link, a body funded by the UK government to promote new business, offers a step-by-step guide to writing a business plan for a new company, or one that you are hoping to grow.
Ultimately, though, there are just two guidelines that you should follow. First, figure out exactly what you need. Across advertising, stock, equipment and staff, draw up an estimated cost for every single part of your business. Secondly, make sure that you justify why you need each of these things. This is not only important information for a potential investor, but also a great way to eliminate unnecessary costs – if you can’t justify it, leave it out of your plan.
Would You Invest In Yourself?
This is a great question to ask in two ways.
First, use this question to rigorously examine your business proposal, or strategy for growth. Forget everything you know about your business and your plans that isn’t in that document. Would you bet your savings on the success of the company? Or would the investment be termed as high risk?
There is no right answer – some of the world’s biggest organisations started out as high-risk investments. But knowledge is everything, so make sure that you know what kind of investment prospect you are before you start.
Secondly, if you’d be happy to invest in yourself, can you? Is there any way that you can find the money yourself, confident in the knowledge that your investment will pay off? Don’t forget that even Lord Alan Sugar needed investment to start his business – so he took £100 from his personal savings.
Maybe you could cancel the holiday this year, or give up eating out. If it’s at all feasible for you to fund your own business, work hard to make it happen.
Traditional Sources of Startup Funding
Once you have an idea of the kind of funding that you will require, it’s time to start looking for investors. Although a trip to Dragon’s Den is a great way to get some exposure along with the money that you need, here are a few of the more realistic traditional routes towards finance.
Banks are the most obvious place to turn for investment in your small business. A traditional bank loan usually offers good rates of interest and doesn’t require you to give away part of your business. However, most bank loans will not be able to match the large-scale investments offered by venture capitalists and private investors – after all, a bank is obliged to help as many people as possible in a small way.
After putting together your proposal, approach your bank. Although some banks will offer loans to people who do not currently hold accounts with them, your own bank will have a better understanding of your finances and, hopefully, treat you preferentially.
Private Investors & Venture Capitalists
As soon as you hear the phrase ‘private investor’ or ‘venture capitalist’, it’s easy to be intimidated. In fact, these terms are very simple – they are individuals or organisations that want to invest some of their money for a profit.
In return for investment, you will be asked to part with some equity in your business. For example, if your business is currently valued at £250,000, an investment of £50,000 would typically give the investor 20% of your business. In practice, this means 20% of the control and, most importantly, 20% of all profits.
Private investors are, however, likely to be more flexible. If you can connect with somebody who genuinely believes in and is passionate about your new business, you may be able to find a better deal.
A great place to start looking for venture capitalists or private investors is online. A quick Google search reveals hundreds of companies that are willing to hear investment proposals, including niche investors that are looking for specific business types.
Get Your Capital From The Crowd In The Cloud
Increasingly, investment has taken on a different face – a friendlier one.
Websites such as Kickstarter.com, Fundable.com and Crowdcube.com all take a distributed approach to investment, making it possible for individual consumers to invest small amounts in the products that they like. Of course, when you add these small investments up, you can get your hands on astonishing amounts of funding.
Crowd funding, also sometimes referred to as cloud funding, works like this:
- You put a proposal online, detailing your business, or your idea. Include rich media such as videos and images, showing the potential of your business and any products involved.
- You set a target amount that you wish to source.
- Investors and customers can ‘invest’ in the business. Usually, they do so for specific rewards. This could be shared equity in the business and potential profits, one of your products, or just about anything.
- If you reach your target amount within the specific time (depending on the site), it’s yours – the money is transferred and you can get on with building your business and thanking your investors!
According to online magazine The Browser, crowd funding websites attracted €10 million of investment in 2011.
Crowd Funding – The Glif Success Story
One of the greatest success stories comes from Kickstarter.com, where two men from New York published a proposal for a new iPhone accessory. The Glif is incredibly simple, used to mount the iPhone 4 to a tripod for better photography and filming.
The inventors offered four different levels of investment, from $5 to $250, with a target investment of $10,000. In just days, more than 5000 people had shown their support for the product by effectively ‘pre-ordering’.
The Glif has since gone into full production – not with the $10,000 budget that was required, but with a staggering $137,417.
For more information on The Glif, see the Kickstarter investment page.
Crowd Funding Tests Your Idea For Free
Although some of these crowd-funding sites are tailored towards creative business, they mark the future of funding for just about everyone. Who better to get passionate about your business and make an investment than the people you hope to sell to at a later date?
What’s more, crowd funding gives you the opportunity to test the market for your products or services. The people who invest money through these websites are the people you will ultimately sell to – so publishing and marketing your proposal is a free way to start building your brand right now.
The creators of The Glif could confidently proceed with production, because they had already proven a large market for their product.
And of course, if there are not willing investors for your business, maybe you should reassess if a market really exists at all.
If You Don’t Ask, You Don’t Get
If I was to give one piece of advice to somebody looking for investment, I would say ask for it. It sounds painfully simple but, in reality, many small businesses never get off the ground because people don’t trust that they can get help.
If you have a burning idea or a great business plan, there will be somebody out there who can help you to make it a reality. So ask them! Start contacting potential sources of investment, ask your bank, and never be ashamed to want money for your business.
When you seek funding, remember that you’re not asking for a favour, you’re offering the chance to be a part of something exciting – your business.