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Start-ups: do you really need external finance

Cook set up in May 2007 in order to make funding more easily accessible for budding entrepreneurs and also because she felt that the amount that angel groups were charging was “criminal”. 

“Entrepreneurs post their business plan on our website which has 1,100 registered angels and the costs will be a maximum of just £499 if their idea goes all the way straight through to funding,” says Cook, “We think that’s very reasonable given that angel groups charge between £5,000 and £10,000 as an upfront fee. But we still get sob stories from people who say ‘I’m desperate and I don’t have £500!’” 

Cook’s solution: don’t go running straight to external investors; be ingenious and find ways to generate cash from the business’ inception.

“If you look at the young entrepreneur groups at schools today, they teach you that if you want to run a business, then you’re going to need to run a pre-business to raise the capital to start the main business. My son recently had to sell bottles of water so that he could pay the deposit to partake in an entrepreneurial event at school. And I think that’s a really good lesson,” says Cook.

“But most entrepreneurs don’t think like that – they’ll just say ‘I need £50,000 to get my business up and running’. But then of course to procure an investment of £50,000, you’re going to need a shareholder agreement which means you’re going to have to employ a lawyer which is going to cost you thousands of pounds, and then you’ll probably need to hire an accountant. But they’ll just say ‘I don’t have that money’. They haven’t really grasped that maybe you need to do something else first to earn that money.”

Cook says she’s spoken to a lot of really successful entrepreneurs, some of whom are angels, who are often reluctant to invest in a project because they can usually see a way that an entrepreneur could grow the business without receiving any outside funding.

“Whether that’s buying something in first or getting credit from their customers before they pay their suppliers – they can usually find a way of doing it,” explains Cook. 

Furthermore, raising the initial funds can be a good litmus test of an entrepreneur’s tenacity and drive.

“Just look at how the dragons on Dragons’ Den started out,” points out Cook. “Duncan Bannatyne’s business career began when he bought an ice cream van for £450! He grew the business until he had a whole fleet of vans and then he sold that business and ploughed the money into another business. So the Bannatyne Health Clubs are his fourth or fifth venture.”

For those not in the know, Bannatyne’s is now the largest independent chain of Health Clubs in the UK and Duncan’s current wealth is estimated at £310m.

Cook also cites the example of one of Angels’ Den investors who paid a visit to a young entrepreneurs group in a local school recently.

“They were making engraved wine glasses and they were trying to increase their profits by charging more to personalize them. And he just turned round and said to them ‘No, those ones should be cheaper because you can take a pre-order so you get the payment upfront. And that costs you less than selling one off the shelf where you have to pay for it to sit there. So the kids turned their business model around and they’ve made a fortune and there’s been no cash flow issue at all.

“Sometimes you just need to have a bit of ingenuity and you can not only raise some good finance, but you can rake in a good profit,” reflects Cook.  

To read more about how Angels’ Den works, click here

Or to read about the inspiration behind the site, click here 

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