Raising Finance for Startups Key Issues for StartUp

Raising Finance for Start-ups

Key Issues for Start-Up Finance • How much? – Enough / not too much – Headroom • When? – All at once – Drip feed / as needed • Staying afloat • Keeping control Set-up Working capital Growth & development

Traditional Textbook Approach Internal • Retained profits • Asset sales External (equity) • Share capital • Venture capital / business angels • Stock market flotation External (debt & other) • Bank overdraft • Bank loans • Hire purchase & leasing • Government grants • Trade creditors

A Reality Check for BUSS 1 • Venture capitalists rarely invest in start-ups • Start-ups rarely reach a stock market flotation • Start-ups rarely have spare assets to sell • Government grants are notoriously difficult to obtain

What the textbooks miss “Start-ups grab money where they can. It is fly-by-the -seat-of-theirpants finance” Hamish Stevenson Sweat equity Credit cards Re-mortgaging Redundancy Borrowed & personal assets Customer deposits

The Four F’s of Start-up Funding Founder Friends Family Fools

Why Founder Finance is so Important • Cheap • Maintains control • The more the founder puts in, the more others will invest • Little red tape or delay • Focuses the mind!

Founder Finance - Sweat Equity • Working for nothing, or very little • Links with opportunity cost • Entrepreneurs multi-task until the start-up achieves scale • 18 hour days are cheaper than an overdraft

Founder Finance - Credit Cards • The most popular source of short-term finance for SMEs • 30 days free credit for business-related expenses • Helps control over start-up costs

Founder Finance – Re-Mortgages • Raising new capital by re-mortgaging • Most popular form of secured loan finance for start-ups • Long-term finance • Impact of credit crunch. . .

Founder Finance - Redundancy • Redundancy packages often provide kick-start finance for a new business • Previous employers may also provide other support services (e. g. assets, training) • Other popular nest egg - inheritance

Business Angels • High net worth individuals who invest in high growth businesses • Investment range - £ 10, 000 to £ 750, 000 • What they look for: – Expertise and track record of founders & management – Competitive edge or unique selling point – Growth potential of the market – Cultural fit & chemistry – Financial commitment of the entrepreneur

Finally, not forgetting. . . Prince’s Trust Small Firms LGS • Lender of last resort • Targeted at under 30’s • Offers more than the money • Other lenders may come on board once accepted • However, bigger profile than reality • Loan guarantee scheme • Popular support for SMEs • Great for start-ups that struggle to offer banks security for loans

Evaluation Points in BUSS 1 • Assessing a business start-up – Start-ups use more than one source of finance – Advantage of flexibility – Don’t underestimate sweat equity & personal assets • Cash flow forecasting & business plans – No excuses from banks or investors for poor plans or spreadsheets – Early danger of overtrading by a start-up • Choosing right legal structure – Implications for availability – e. g. equity