There’s only so far you can go in business before you either a) start running out of cash or b) actually need cash. Once you have reached this point, you realise that you may need to start thinking about funding. But where on earth do you get the funding from?
Friends and Family
Once we have gone past the idea stage, have maybe found someone to go along with your idea and you are now a Co-Founder, you need some initial funding to get you going. So where do you get this money from? The people who have had to bail us out before – friends and family. The average start-up will receive on average approximately £10,000 from friends and family to help them develop to the next stage.
So heading back to the basics of how to fund a startup, we know some of you may know this already, but for those of you who don’t, it’s important to remember that with every bit of funding you receive or every time of investment, you will give up a part of your company (equity).
To begin with, you may have 100% of your business, but don’t forget that this is 100% of a very small business. Think of your business in terms of a cake. You may have the whole cake to begin with, but as you receive more and more investment, you need to give away more slices of the cake. Indeed, you may have a reduced portion of the cake, i.e. reduced equity such as 40% as opposed to the 100% you started with, but your slice of the cake will be bigger because you are now a bigger company with more money than when you started.
Yes it can be daunting to give away some of your equity, but in the long-term, you are receiving much more in return!
So imagine you’ve given away 5% to a member of your family who gave you £10,000, now you need to think about getting the big bucks in. Valuing your company is hard, especially as you’ve not really got any money behind you, you’ve only come so far in your idea and you don’t have many customers, if any! In 5 years’ time, you need to forecast how much would your company be worth, how much do you need invested right now and how much equity should you give away?
Firstly, have you considered incubators or accelerators who provide grants to get you started? They could offer you £20,000 – £25,000 for around 10% of your company (speaking hypothetically). This is a great way of how to fund a start-up and a good initial investment to get you up and running. They are there to help start-ups and young entrepreneurs, so don’t be afraid to enquire or go to them with a proposal.
Imagine now you’re thinking of looking further afield for a larger sum of investment. Angel Investors tend to give away large sums of money to companies that are valued at a lot of money, say £2 million for example. You have to ensure that you are going to give away a fair amount of equity for the proposed investment. If they invested £100,000 in your business that is supposedly worth £2 million in 5 years, I think they’ll be pretty happy with their Return On Investment….
So you’ve given away 25% of your company and received £110,000 in return and aim to make £2 million in 5 years’ time. That’s not a bad start on how to fund a start-up!
Don’t forget there are many organisations out there who can offer grants, match-fund your initial investment and get your start-up going. Don’t be afraid to value your company at what it could realistically achieve. Obviously don’t overvalue your company at a ridiculous price as you are most likely to receive no positive responses and look like you don’t know what you’re doing. You need investors to have confidence in you as a person as well as your idea.
If you’re willing to put the hard-work, time and effort into growing your business substantially, there’s no reason why you can’t aim to achieve £250,000, £500,000, £1 million or £2 million in 5 years’ time!
Don’t forget that predicting cash flows for the next 3-5 years is exactly what it says on the tin – a prediction. As long as you have a set of realistic financial forecasts, you can’t go wrong.
So there you have the basics on how to fund a startup! There are many organisations out there who can help so don’t be afraid to ask!