Lean and in the Green: funding for your start up and how to access it.
This short article articulates my view on why a new business should or should not seek funding, where to look for it, common questions asked and how to readying yourself before you approach a funder.
Why do start-ups even need funding?
Each company goes through a similar journey of growth. There are many ways to describe this, but the journey is commonly from a bootstrapping startup with little or no funding, through into delivering work up to, say £500k, then into a lifestyle business, then some form of growth and investment, then into performance and if you are lucky, transformation into a unicorn! For most people, getting a startup off the ground requires at least some form of funding, even if it is just some savings to keep the lights on for 6–12 months while you get those steady sales through the door. During this time, business owners are adding value all along. First of all, let’s look at why it is important to add value to a business ahead of, and during, growth?
Well, that value might make a higher sale on exit (you will exit in some form, so plan ahead for this!), a better offer if going to the market, a complete business for external buy-in, or even a management buy-out. On the down side, you might run out of cash, or customers, or both! Ideally, you want to be in a position where you can demonstrate that the business is more than simply you, and the value you have built into it is a legacy piece for the future.
There are lots of barriers to this ideal picture of recurring revenue, ever extending cash reserves and increasing profit — for example a lack of cash to grow, an inability to penetrate new markets or deliver new products or services, a lack of systems or processes in place or indeed no clear plan for growth. So, what are the keys to success in funding a startup? If you listen to this man, you’re a moron if you think you need startup funding…
What you can do now to be prepared for funding
Whilst I agree with the sentiment expressed by Mark Cuban in terms of commiting to working hard, I would say that the majority of startups do require some form of funding to startup. So how do you know if you need funding, how much do you need and where do you get it from?
How do you know if you need funding?
Most businesses have a set of numbing, self-aggrandising documents such as business plans, vision documents, theories of change, future forecasts, weekly, monthly and annual budgets and other weighty tomes. This is all fine — your particular business might exist in a place where this is expected and essential, however, I would suggest taking a hard look at everything you produce and consider pulling all you need into one handy file, one document. Can you do it on one page?
If you can distill these thoughts, then you can also draw out your KPIs. What are you measuring daily, weekly, monthly? There are some excellent resources that exist for free, over the internet or from your local business support organisation, that will help you write out your key lag and lead indicators and distill them down to your top 6 to 12. So, you have your planning documents and KPIs. You need a budget.
How much do you need?
Keep this part simple. Open Excel or Numbers. Months along the top, income and expenditure down the side. Don’t forget about your taxes. Don’t forget about timing (people will take twice as long as they say to pay and payments will be demanded of you immediately). Do the next 12 months profit and loss in this way to show how your business will be profitable and keep it simple. If you don’t understand how something works, find someone who knows and ask. They will be happy to help you. Then do a cashflow to show what your bank balance will be doing over that same time period. Again, keep it simple — open a spreadsheet, dates down the left column, then income and expenditure columns and a balance column. Put everything in, show the balance as a running total and expect payments to take forever to come in. This will show if you need any cash (working capital) to borrow or what the heck you need to sell to keep in the black. Do it for your financial year and you will feel super organised. Monitor it at least monthly. Be prepared ahead of time — if you think there is a blip coming, talk to the bank about an overdraft. Save cash in a separate account if you can and have a cash balance you can rely on to stop you going out of business. Only take out the business what you need.
Where do you get funding?
You’ve got this far, you have most of what you will need to show people if you think you need funding. But what type of funding is available and where do you get it? There are so many different types of funding — bank loans, family and friends, credit cards, tapping into your pension, attract an angel investor, crowdfund, peer to peer loans, microloans — the list goes on. To find these, the absolute best place to start is a conversation with your local business support organisation, local government business support team and by asking those around you and on the web. Between these sources you can find anything.
To me there are some basic elements to funding to understand. Grant funding is money which you will not have to pay back, however, when applying you better be sure it fits because you will be expected to deliver something against it. Loan funding is money you have to pay back with interest. You either want money for revenue costs such as salaries or for capital costs such as equipment. Equity funding is giving away some holding in your company for money. If you absolutely need funding to startup, then you’ll be giving something away or paying handsomely for the borrowing, or both.
So be ready. Read as much as you can on startup funding, watch videos, trawl through books and audio books and ask questions when you get stuck. Prepare for the questions ahead of time, be sure of things like your pipeline and have a belief in your product or service, and stay motivated. Think hard about getting into loans where you may have to put up a personal guarantee, and talk to as many people as you can to really test your understanding.
I hope that you can be in a position to bootstrap your startup, grow your income and build value into your company to be sure that your exit is on your terms. And that when you leave, you leave more than an economic footprint. You pass on the belief in your product or service as a legacy for the future.
