How to find the best funding fit for your business.
Entrepreneurs can very confidently come up with ingenious business ideas, but many are simply unaware of the many types and sources of funding available to support their plans.
Raising finance is often portrayed as painful and time-consuming – but not if you know where to start.
There tend to be four main stages of development for ventures: 1) seed capital/pre-start; 2) startup; 3) early stage; and 4) expansion. This guide introduces the sources of funding most appropriate to each stage and the typical amounts that you should expect to receive.
1) Seed capital – you have a great idea and need finance for additional research or to produce a prototype.
Entrepreneurs that require seed capital funding could receive up to £50,000. Ideas are difficult to fund because they are often unproven and present a great deal of risk. As a result, funding is likely to be sourced initially from founders’ personal funds, then potentially from friends, family and personal contacts. Grants may be available, but are often laborious to obtain. Various soft loans also exist from local enterprise agencies in addition to proof of concept funds. Banks don’t often lend to pre-revenue companies, but where they do, they will require security against personal assets.
2) Startup – you have researched the market and established a working prototype or set of processes for the business. You have not generated any sales yet and need finance for working capital needs, such as initial marketing, salaries, development or testing.
As with seed capital, investment can be secured from private investors, but the business will need to have a convincing proposal and be backed by a strong management team. Injecting some of your own money into the business will help to convince external investors that you are serious.
A startup could receive up to £500,000 in funding. Specialist investment funds and incubator units may be interested in supporting this type of business, particularly in high-growth sectors such as biotechnology and IT, but it’s only really business angels that are funding high-risk, unproven startups right now.
3) Early stage – you have finalised the product and generated a few sales. Funding is required for marketing and operations to make the business fly.
Once it has begun generating revenue, a business is in the privileged position of being able to access larger-scale equity investment, including venture funds, investment syndicates, venture capital firms and private investors. However, it is important that the business differentiates itself from the rest of the crowd as these funders receive hundreds of business plans a month.
Bank debt is a more realistic prospect for an early-stage business, compared to pre-revenue ventures given that with revenues, the debt can be serviced. Although it is extremely difficult to secure good terms in the current environment, government-backed schemes such as the Enterprise Finance Guarantee scheme and loan investment funds can be suitable channels to pursue.
On average, an early-stage business can typically receive up to £750,000.
4) Expansion – you have an established business that is generating profits and needs funding to develop new products or explore new markets.
With a solid track record, management teams normally find it easier to raise equity finance, although they will still have to prove explosive growth potential. Expansion finance will typically be between £250,000 and £2m.
As with all stages, it is important that businesses thoroughly prepare themselves for the investment process and ensure that they have a robust and compelling proposition before making a pitch to potential investors.
Honesty, transparency and accuracy – and a pinch of realism – are key to successful dealmaking and attracting investment in the post-credit crunch era. While it may be tempting to rush in and take the funding plunge, businesses should thoroughly explore their options and be patient in order to find the right funding line for the long term.
Scott Haughton is a founding director at private investor network Envestors, which has helped more than 60 companies to raise in excess of £23m in the past three years.