There’s no way to sugarcoat it: starting a new business is tough. Really tough. Those first few weeks and months are full of decisions, such as where your target audience is and what your product’s unique selling point is, but what many beginner entrepreneurs fail to pay attention to is the financial aspect of their business.
Of all small businesses that fail, 82% of them fail because they were critically low on funds. Moreover, 29% of small businesses fail because they were unable to generate enough cash right from their inception.
One of the most vital parts of the launch of any new business is the fundraising stage, and not in the form of a charity bake sale. Rather, this stage is about growing confidence in your business to the extent where an investor, or a bank would be willing to part with some of their own money to fuel your new start-up.
If this makes you feel a little shaken, then you’re in good company. Michael Budden and Jonny Clarke remember their initial months of pre-launch fundraising well. Founders of recruitment website Locate a Locum, which puts locum pharmacists in touch with potential employers, began their business in 2013. At this time, they were only representing a small number of graduate pharmacists, with links to several Belfast based pharmacies, but today have connections in over 8000 pharmacies across the UK, with thousands of locums making use of their services.
Reflecting on the ways they managed to bring in cash in their early stages, and the struggles they went through, they have decided to share their fundraising techniques and tactics to encourage others to pursue their start-up dreams. They have four main points: Seek out private investors, seek out loans, take part in incubator programs and trade equity.
Take part in incubator programmes
Incubator Programmes are schemes which assist start-up entrepreneurs to develop their business plans and skills, while networking with others in the same position. Some of them are located “in person”, with shared office space and meeting rooms, or in person training and development, while others are web based, allowing entrepreneurs in various niches across the world to communicate and collaborate effectively.
Michael and Jonny made use of an incubator, and considered it a vital part of their start up process.
“The incubator staff were the first people to believe in our idea outside the founders of the business and it was a kick to take real action. From participating in the program we validated our idea, grew a team and raised funding – all essential parts of a tech start-up.”
Incubators programmes not only provide development support, but they often also put new entrepreneurs in touch with potential investors, or other sources of start-up funding. Moreover, incubator programmes can put new entrepreneurs in touch with other start-ups and potential mentors, meaning that your new business will have access to a first class support system.
Locate a Locum said “Our incubator programme opened our network to investors, provided us with office space and mentors who challenged us on assumptions we had. Even a small thing of learning how to pitch provided invaluable as we raised our funding round.”
Incubator programmes often last anywhere between one and five years, with varying levels of commitment and cost, and a wide range of potential outcomes, from simply building business skills to being matched with investors.
Similar programmes, known as accelerators, are similar to incubators but have a much shorter duration, such as 3-6 months of intense training and development. These may be extremely time consuming, and require a large commitment, but have had an impressive yield in the last few years, with accelerator programmes birthing companies such as Airbnb and Dropbox in the last ten years.
Seek Private Investors
“Through the network of our accelerator was how we found one investor but part from this we hustled hard and looked opportunities within our own networks. I believe a valid investor was someone who not only had money but could contribute value to our business. It was a case of kissing so many frogs to find a prince but it proved worthwhile. In Locate a Locum we have two investors – one who is in the pharmacy technology space and second who is a software veteran. We have benefited more so than just having access to their money.”
There are a couple of ways to find investors. You may have a local small business development centre. For Locate a Locum, this was Techstart NI, who invested £250,000 into their business.
You may be able to find investment networks, too.Angel investment groups exist in most countries. The Angel Capital association offers a registry of certified Investment groups across the US and Canada, and similar registries can be found for other parts of the world.
Although it’s almost cliché now, crowdfunding can still be a valid form of gathering investment, dependent on how much money you need and how well you can publicise.
However, it’s important to know that you’re getting more than just money when you bring an investor on board. Many investors will be willing to offer advice and wise counsel for your startup, making your business more likely to succeed in the long run. For Locate a Locum, knowing the space they were entering into meant they chose to bring on-board investors from the fields of pharmacy technology and software. For your business, this will look different, but the principles are the same. Find someone who understands your market niche better than you do and can add more than just cash to your startup.
On the subject of approaching investors, the founders of Locate a Locum had this to say:
“We reached out with the ask of grabbing a coffee. At that coffee, we knew we would have the opportunity to present. We also asked our agreed investors to refer investors they thought would be suitable.”
Jonny and Michael have understood the two main points of approaching investors – Being proactive and being prepared.
Being proactive means taking chances – It means approaching investors, and asking them to hear you out. It means seeking the sort of investors who you’d like to have on your staff.
Being prepared means having your pitch down to a tee. It means having a concept that you’ve been over hundreds of times, it means being ready for whatever they may ask you. Most of all, it means being ready to put their money to good use.
Seek out Loans
If you want to launch without feeling like you have a pair of eyes looking over your shoulder, then perhaps taking out a business loan might be a better option.
Business loans get a really bad rep in the startup world, and often, for good reason. Starting your business with a loan might mean you open your doors in debt, which can be tough to recover from. However, managing your business loan is just as simple as managing your ledger. Managing your investors can be a lot more complicated.
Entrepreneur Magazine lists several reasons why you should consider a loan. For example, having found a business opportunity that outweighs the possible debt, being able to purchase new inventory, or the ability to build capital. But they also suggest a list of questions to ask before applying: How much do you really need? Can you pay it back? Can you gather it from other sources?
Loans can come from a variety of places – banks, lending agencies, friends and family, only a few examples. On average, only 25% of small businesses are granted loans by big banks, while 50% are approved for loans by smaller banks or lending agencies.
Loans can be a massive helping hand to a new business, but without close observation, their blessing may turn into a curse.
One often overlooked way of funding a startup is through selling equity. Here, you sell shares to willing investors in your business in order to raise funds. This can be difficult in the early stages of business development, but not impossible.
One of the main advantages of raising funding through equity finance is that you gain the ability to generate funding without also taking on new debt. Their investment in your company is committed to your business, with no obligation of repayment until the shareholder decides to sell their segment.
Further, the new shareholders will be partially responsible for the success (And, potentially, failure) of the company. This means that the financial risk of a failed business is not entirely on your own shoulders – This gives many newly minted entrepreneurs a confidence boost, making success more likely.
However, The Business Professor notes that selling off parts of a company to investors may become a burden, as your new investors may become controlling or divisive. For higher risk startups, it may be difficult to entice investors on board anyway.
Any equity investors you bring on board will want to know what you are doing with their hard earned money – meaning, regular updates, keeping up-to-date with their communications, etc. This brings new logistical issues into your company, bundled up with your new shareholder’s money.
Finding funding for your start up is difficult, but manageable. The founders of Locate a Locum have now managed five successful years since their original funding round. Following their tips for where to find cash will guarantee you a strong start for your new business, whether you take part in an incubator and find investors, or if you take out a loan or decide to follow a path of equity funding.
These four ways of funding are just a snapshot of all the ways you can generate some cash for your new business, but they represent a well-trod path.
Have you tried any other ways of raising money for your startup? Or, do you think any of these work particularly well? Let us know in the comments below!
Bio: Jonathon Clarke is a qualified pharmacist with experience across hospital, community and academia sector. Michael Budden is a web and graphic designer. They developed Locate a Locum together when Jonathon discovered first hand the struggles of finding locum work. Both are based in Belfast, Northern Ireland.