They say that those who have the gold make the rules. And in the world of entrepreneurship, a similar principle applies: those who have the money make the money. It is difficult to set up shop, begin trading your wares, or live without at least some funding. In the short term, money will help jump-start your start-up. In the medium to long run, it will enable you to build it.
So there are two burning questions to be answered: what kinds of start-up companies attract funding, and where can they go to find it?
Investors are interested in products or services that have the potential to grow fast enough for them to make a good return quickly (usually within about three to seven years). So, if you are looking to pique their interest, you will need to demonstrate that your start-up has that potential. There are three main ways in which you can do so:
Investors tend to like to see that there are real life customers out there ready and waiting to spend money on your product/service. You might have this level of traction, but don't be surprised if an investor wants more evidence than just your word. Your chances of getting the investment you need are exponentially improved if, say, significant numbers of would-be customers have given you a firm indication of interest. For online start-ups, try to get a version of your website, even if it's not final, up and running as soon as possible. Investors will be keen to see evidence that your business can prosper.
If you are unable to get the kind of traction mentioned above, the next best thing is to persuade investors that you are positioned well to exploit a "sweet spot" in the market. Are you providing something that will be hard for others to copy? Are you providing something that customers have demonstrated they value? Are you utilising up-and-coming technology, methods or trends? You need to be answering "yes" to these questions to stand a good chance of obtaining investment. These things in themselves will probably not be enough to attract funding. However, they will help you on your way to gaining the traction that does attract funding.
Build a team around you who are well placed to develop and manage your start-up. Surround yourself with people who have experience and connections in the sector you are entering. Many investors view the team as the most important element of a start-up and with good reason: "businesses" don't achieve success, people do. In order to maximise their return on investment, investors rely on an assured management team to guide the business through good times and bad.
With these three elements in place, you will be on your way to demonstrating that much sought-after potential that attracts funding. Before you can start laughing all the way to the bank, don't forget the money! Here's where you'll find it:
- Accelerator programmes are schemes aimed at accelerating the growth of start-up companies at an early stage through funding (typically of no more than £25,000). The funding they offer is accompanied by business support resources such as office space, mentoring, and, perhaps most importantly, introductions to key partners and clients. Accelerator programmes are not open to everybody though; each one varies but there's usually some kind of application process involved. In exchange for receiving this assistance, the programmes usually require an average of 5-10 per cent equity. Notable European programmes include Seedcamp and Springboard (applications for Springboard's 2011 intake are now open, but close on February 20).
- Angel investors are high net worth individuals who are seeking to invest their own money in a start-up company in exchange for an equity stake in the business. The level of funding you're likely to get from angels is in the high five-figure or low six-figure range and the ask is typically a 20-30 per cent stake in your company. It was angel investment that propelled The Gateway from a local student-run newspaper to a national business. The best way of tapping this source of funding is through a personal introduction, but failing that you should try accessing the networks of angel investors based around the UK. Check out the British Business Angels Association for further details (http://www.ukbusinessangelsassociation.org.uk).
- Venture capital firms (VCs) essentially pool large amounts of money from investors such as pension funds and mega-wealthy individuals and invest in high-growth start-ups with the aim of making a hefty return for the investors and partners of the firm. VCs are only interested in investing significant amounts of money (on average, a minimum of about £500,000) and so, unsurprisingly, any VC investment will likely come with strings attached - they'll tell you exactly how the investment can be spent. As with angel funding, a personal introduction is the best way to get a VC's attention. Two well known VCs in the UK are Index Ventures and Eden Ventures.