Nexia International, a top ten network of independent accounting and consulting firms, has compiled a helpful guide on the options available to start-up businesses.
With signs of recovery in economies around the world, many young businesses have an opportunity to grow and mature, and play a vital role in their country’s fortunes.
Regardless of the size and scope of a new business, Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson, a member firm of Nexia International, recommends looking at all the growth funding options.
“Some entrepreneurs are reluctant to give away equity in their business,” says Guy. “However, giving away equity in exchange for both investment and expertise can make good business sense – after all, 30% of something is better than 100% of nothing!”
In addition to government grants, below are seven growth funding options available for new businesses:
1. Friends, family or ‘fools’
Many businesses start with funding from the 3Fs – also known as friends, family or ‘fools’. The latter may sound a bit harsh but might include the less sophisticated investor, willing to take a risk on a new business idea. The 3Fs will almost always be the cheapest and easiest route to gaining early stage funding, with easy equity terms or loans made on a low interest or even interest-free basis.
2. Accelerators and incubators
Accelerators and incubators, (simply known as advisers in some countries) as the names suggest, are focused on helping start-ups grow their business quickly. These organisations will normally offer shared office space, as well as strategic business advice and mentoring services.
The slight distinction between accelerators and incubators is usually when it comes to funding. Accelerators will typically take growth businesses from concept to product, providing them with early stage funding and mentoring, in return for equity. Some may have links to venture capital funds or angel investors who can provide funds. Incubators, on the other hand, will provide guidance on accessing financing but rarely fund businesses directly.
Similarly, some countries have seen a growth in ‘credit alliances’, involving former entrepreneurs providing funding and some aspect of coaching and support to new entrepreneurs.
3. Business angels
Angel investors tend to dominate the lower or early stage end of the private equity market – usually investing from £10,000 to £500,000 of their own money. In return for their investment – and often their professional know-how and expertise – they’ll almost certainly be looking for shares in the business. Business angels will often demand less formal terms than institutional investors and can be incentivised through beneficial tax reliefs.
4. Angel networks and investor clubs
There are thousands of angel networks and investor clubs worldwide, such as Angel List and the Indian Angel Network. These typically bring together groups of business angels, with varying degrees of formality.
5. Venture capital and private equity
Venture capital is normally provided to early stage businesses with high-growth potential – usually after the business has been established but before it has achieved profitability and scale. Venture capital investments are therefore high risk, but can carry the potential for high rewards. For a business looking to grow fast and boldly, and needing a significant cash injection (smaller venture capital firms will rarely want to invest less than US$1.5m), this might be the way to go, although smaller investments are increasingly being made in the area of technology. More mature, established businesses may wish to consider private equity investment for expansion, although private investors are often only interested in funding businesses with an operating cashflow of around US$4.5m and the ability to achieve global scale.
6. Corporates
Corporate venturing involves a larger company providing finance and resources to a smaller business, in return for equity. This route can make growing businesses appear more robust and scalable, giving them instant credibility. It can also offer the flexibility of a small business combined with the resources and connections of a larger organisation.
7. Crowdfunding
Crowdfunding is a new, fast-growing phenomenon enabled by the internet and social media. It enables businesses in some jurisdictions to raise money from the general public, who can invest small sums by way of equity, loan or in exchange for benefits in the form of goods and services.
Businesses will normally have access to a variety of funding options. The trick is learning to combine these in order to create financial stability and – where a business has given away equity – to maximise shareholder returns.
