Navigating the minefield of financing for startups
by Tracy Monday, Sales & Marketing Director, Xeocom
This short series of articles is aimed to give tech startups a high-level outline of the key critical business functions, some dos and don’ts interspersed with some stats and experience. This article is all about finance. It’s not seen by many as the most exciting part of being a startup, and all too often dismissed as the ‘invoicing and paying people’ bit! But a startling static is that over 30% of startups fail because they ran out of CASH!!! Very closely followed by not having the right team. The symbiotic nature of these two factors alone account for over 50% of startup failures, which is why it’s critical to get your plan right, your team right, and your finances right from the outset.
Easier said than done, right?
Having a great idea and turning it into a great product or service is not enough. Very few entrepreneurs start out understanding how to run a business and moreover financing for business success. The brutal fact of the matter is that most learn the hard way, by getting it wrong. Wrong doesn’t necessarily mean failure, but getting it wrong inevitably impacts your success however you measure success.
There has never been so much money washing around the tech startup community.
The good news it that as a result of Globalisation and Digitalisation there’s an abundance of financing options available at your fingertips and there has never been so much money washing around the tech startup community.
So how do you choose the right financial option for you?
The following is a list of financing options with some guidance of what and why they may be worth considering:
|Bank||This is the traditional most commonly known form of finance. You can finance the physical assets of your business, the IPR, or the whole.||100s to choose from. Strong governance.||Investment costs can be high. More suited to more established businesses.|
|Venture Capital||Often incorrectly mixed up with Angel investors. These guys are huge and invest in many businesses. They tend to hunt around Tech Hubs but in more recent times have spread their nets wider.||More than just money. Professionally managed with mentoring and monitoring available. Business financing not business equipment.||Takes stock in IP of company. Focus on 5-year realisation of investment with IPO sale. Target more established businesses.|
|Angel Investors||These are high-net-worth individuals who invest their personal monies in organisations they have an interest in.||Focused on startups. Profession mentoring and guidance as part of their investment.||Lower capital investment than VCs. More heavily involved in business delivery.|
|Incubators & Accelerators||An incubator is more focused on nurturing business whereas accelerators drive or fast-track business growth. Tend to be focused in cities and funded by government initiatives or large enterprises in the region||Community focused and offers mentoring and business function support.||Short term, typically 6 months. Business will then sink fast or survive and thrive on own.|
|Crowd funding||This has become a much more common source of funding in recent years. It’s less business intrusive in that investors are not involved in the day-to-day management of the business.||Free marketing in local or national markets. Uncomplicated financial/investment models compared to VCs and banks.||No professional mentoring or business support. Typically much smaller capital available.|
|Government Funding||Local and national startup funds and grants available.||Substantial sums allocated. Business case lead.||Very heavy on the governance and takes a long time to get.|
|Microfinance||Available to everyone.||Less bureaucratic and more accessible.||No management or mentoring support. Lower levels of capital investment.|
|BootStrapping||This is self funding via revenue or personal capital.||No governance, no interest charges and 100% control.||Can inhibit or impact growth. More stressful with no professional mentoring.|
Hints and Tips
If possible, investigate thoroughly all options before you start. Know what you need now and what options are available to you down the line, considering the effect they will have on your business as it grows.
The old adage “act in haste repent at your leisure” is as true in your business as it is in your personal life.
Even the most savvy of people can succumb to the enthusiasm and charisma of an investor.
Combine that with the other saying of “beware of men (or women for that matter) bearing gifts” also hangs true. It’s all too easy to take the first offer. Even the most savvy of people can succumb to the enthusiasm and charisma of an investor. Never forget investors are sales people, they are selling you a product and in return you will pay.
Time is a commodity for a tech start-up and it’s an expensive asset, but it’s so important to explore all offers. So make sure of these things:
- How do they sit with you personally and professionally?
- What do they offer, and not just financially?
- What are their incentives?
- What experience do they have (this is more geared to VCs and Angels, but has bearing on Banks and Microfinance options)?
Don’t feel that you can’t ask questions and take up references on their experience; you wouldn’t take on an employee without checking them out. Having an investor you feel comfortable with is good, but remember, they have a job to do and that’s to help you succeed.
…get a specialist who’s trained in company/corporate structure and financing to advise you. It will be worth every penny.
And above all, take professional (legal and business) advice. Many will give you 30 minutes free advice. But before you enter into any agreement, whether you think you can afford it or not, get a specialist who’s trained in company/corporate structure and financing to advise you. It will be worth every penny. Spending anywhere up to £10,000 to get the right legal structure in place is a drop in the ocean compared to what it could cost you in the long run. The worst case is they confirm everything you knew and you come away wishing you had saved the money (I’ve never seen that happen, but its always a possibility). The best case, which is typically the case, is that they prevent you from making a very costly mistake.
Having secured your funding you need to focus on building the right team, which will be covered in another article in the Startup Clinic.
And finally, never ever underestimate the fact that people do not pay on time. Make sure your business plan has 3 positions, Upside, Expected, and Worst Case. You need to plan for debtors and defaulters. Payment timescales taking twice as long, if not longer, than you expect. Although this is less of a consideration for online tech transactions (these need to factor a percentage of your revenues from sales going to the card transaction companies and intermediaries).
The Tech Trailblazers team has specialist business advisors that can help as part of the startup program.
Tracy Monday is not only the Sales & Marketing Director of Xeocom but also the Commercial Operations Director for Cloud Gateway, a firm which is still in its early stages having been founded in 2017.
Having joining the IT industry in the 90s, she has been part of what can only be described as a Time Tunnel journey to now. She has been privileged to work with some extremely talented individuals and forward-thinking businesses, large and small.