Partner Article

How to finance your start-up

One in three aspiring entrepreneurs say lack of funding is the biggest barrier to starting a business. A survey of more than 8,000 people by the education and mentoring program, Entrepreneur Seminar, found that 85% had less than £10,000 to invest in a business, with 25% of those unable to invest more than £5,000.

Fewer than one in two start-ups survive beyond the first five years so knowing how to fund your business – for the short term and beyond – is crucial to its viability.

Don’t dive straight in

First, it is important to understand different investors and tiers of investment. There are different requirements for raising finance, depending on the amount of capital you need to raise.

Funding tiers start with friends and family and move upwards to bank loans, angel investors, angel syndicates, venture capital and public markets. Due to the vast range, you are likely only talking to one or two investor groups at any one time and looking for what is known as ‘seed capital’. Anything between £50,000 to £250,000 would be a traditional starting out level of seed capital.

That capital will be needed to get past the proof of concept and help with early customer acquisition. When the business has proven it works in the market, you may then seek to extend the capital range by up to a million pounds. By this point, you are still only talking to angel investors and syndicates, as it’s unlikely you’ll be speaking to venture capitalists. When considering your capital source, it is important to understand the kind of investor you are talking to.

Research your investor:

Your potential investor will be looking for certain attributes as validation before investing, so put yourself in their shoes. While it is hard to raise money, anyone can do it. To be successful, ask yourselves these questions. What markets they are in – will your opportunity be relevant to them, and if so why? Have they have already invested in competitors and does your business idea represents a potential conflict of interest? Do they have a particular niche, and if so is that something your business proposition can take advantage of?

Levi Roots provides an excellent example of someone who researched his potential investors before pitching his ‘Reggae Reggae Sauce’. Peter Jones had previously invested in the food and drinks market but did not have investments in any of Levi Roots’ potential competitors. He knew his business plan like the back of his hand and was able to attract a £50,000 investment to launch a business that became a £30 million market leader.

Positioning your opportunity:

As the example of Levi Roots demonstrates, a clear and well-researched business plan is essential when positioning your opportunity. A business plan is nothing more than a set of data points that the investor can point to, but will address concerns such as the business opportunity; the relevant markets; who is the team behind it; product/service descriptions; marketing plans; how you aim to capture customers; associated risks and the medium to long-term plans of the business. Once you have an effective business plan, you can focus on creating a compelling pitch.

Creating a compelling pitch:

To attract investors, you must know every detail of your business plan. This can be done in three steps. First, master your elevator pitch. You need to be able to describe your opportunity in less than 30 seconds - crystallise what you are selling. If you can pitch the opportunity to the customer, the investor will be able to make the connection.

Secondly, make sure you know all of the information in your business plan. Knowing your business plan well will enable you to remain confident under pressing questions – which are inevitable when investors are about to risk their own capital.

Finally, make use you use good third-party data. This will provide non-biased clarity to investors about competitors, your market, costs and customers. Those three steps alone will not guarantee you successfully raise capital – but without completing them you stand risk becoming just another statistic, another bright business idea that never got off the ground.

Martin Warner is founder of Entrepreneur Seminar, an education and mentoring program for start-ups.

This was posted in Bdaily's Members' News section by Martin Warner .