Business Funding For Dummies®
Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester, www.wiley.com
This edition first published 2016
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The fact that you’ve taken this book off the shelf or been given it as a gift is a good indication that you’re seriously thinking about starting or expanding your business, and you realise that you’re going to need some other believers, in the form of lenders, investors and facilitators, to accompany you on your roller-coaster journey. Firstly, well done for thinking outside the box, and secondly, congratulations for realising that help is at hand and you don’t have to do everything on your own.
Whatever your reason for dipping into the pages that follow, it’s safe to assume that you have an inkling that luck and a fair wind are not enough to enable you to achieve funding success for your business, and you want to find out as much as you can in order to ensure that you come out with the best result for you and your business.
This book starts with the premise that a good idea, better-than-average skills and hard work are not enough for you to raise the finance you need to create a viable business – one with growing revenue, healthy profit margins and a good rate of return on investment. It brings together information and examples from a wide variety of sources, some essential knowledge, and some tips, hints and guidelines for maximising your efforts to achieve funding success, no matter what the economic backdrop is.
Half of the businesses that start this year will fail. Of those that survive, few will reach the scale necessary to make a significant impact on the UK economy as a whole. Everyone in the business community wants to see this situation improve, and it’s clear that some extra help is required.
One area that’s been identified as a stumbling block to business growth is accessing appropriate business finance (you can find out more in the government-commissioned Scale-Up Report). Many smaller businesses aren’t aware of the full range of external funding options on the market. However, you can find a good deal of funding out there, and like water trickling down and through, it’ll find its level. This funding is looking for good business deals to invest in, but not just any old deal flow; it wants good, solid businesses with amazing teams and a product or service that has a growing and sustainable market. It’s up to you to find the right funds at the right time and for the right price.
If this isn’t happening, it may be due to:
This book gives you help in all these areas.
In addition, every business needs a business plan, an eye-catching pitch deck, an impressive investment memorandum or opportunity note, and a short, sharp, crystal-clear executive summary. You also need a well-researched and thought-out story that covers how much money you need, what you’ll use it for and what you’ll provide in return to a funder that has the faith and conviction to back you, your team and your credible plan and idea.
This book is also invaluable to the inventors and innovators among you. If you’re researching or developing some groundbreaking or life-changing product or service, you may benefit from the down-to-earth business advice and guidance I provide, as well as the unearthing of possible financial support, be it tax credits, grants or competitions. Your discoveries may mean the difference between your next big thing languishing in the bottom drawer or successfully travelling from the lab to the light of the public gaze.
Business Funding For Dummies, UK Edition, can help you succeed no matter what stage of funding you’re seeking. Whether you’re about to take your first plunge into funding or you’re an experienced entrepreneur, you can always discover something new. This has never been more relevant than in the current funding climate, where alternative finance is really finding its voice and creating many challengers to traditional providers, and the lines between investment rounds made by equity providers are blurring, opening up avenues that may have previously been closed to you.
This book is set out to allow you to dip in and out of it to suit your situation and needs, no matter what stage you’re in:
This book brings together essential, go-to information about getting your business funded. It assumes that you’re either just starting your funding journey and want to see where you stand now as well as the road ahead or that you’re somewhere on the road already and want to find out what’s out there that will work for your business at every stage along the way.
You may find yourself in need of this book for a number of reasons:
This is a book for a business that has or will have products and services that people want to buy so your business can grow and access a variety of funding options. This book has chapters that point you in the direction of potential guidance and advice, and assumes that everyone has something to learn.
I don’t assume that you know everything about how to go about funding your business, or that you’re less of a businessperson if you have some knowledge gaps. What matters is that you’re eager to learn and willing to make a start.
All For Dummies books use icons to highlight especially interesting, important or sometimes dangerous information. In this book, I use the following icons:
The Tip icon draws your attention to useful and practical points or information.
This icon alerts you to a potentially precarious or dangerous situation, and reminds you to stop, look and listen and proceed with caution.
The Remember icon gives you a gentle reminder that this bit of information topic is important enough for you to note it down.
The True Story icon lets you know that I’m referring to a real-life business example that shows you how another entrepreneur handled a situation or topic that you may encounter yourself one day.
The Technical Stuff icon is next to information that number-crunchers may like but that isn’t necessary to understand the topic at hand.
As you embark on and travel further along your funding journey, you can add to or supplement what you’ve read here by checking out some of the 24/7 extra information hosted online. You can access bonus articles and an extra Part of Tens chapter by going to www.dummies.com/extras/businessfundinguk or discover the book’s online cheat sheet at www.dummies.com/cheatsheet/businessfundinguk.
Resist the need to feel that you must sit down and read this book from cover to cover unless that works for you. You don’t need to read the chapters in order to get all you need from it – you can make à la carte selections rather than being stuck with the set menu. Don’t turn what’s an enjoyable and exciting voyage of discovery into a boring, mundane walk.
Start by taking a few minutes to read through the table of contents and get familiar and comfortable with the topics this book covers. Perhaps select a chapter that takes your fancy, piques your curiosity or hits the particular nail on the head that you need to hammer home most urgently. This may be looking into the various debt products on the market or strategies for coping with family members who want to invest in your business. Start anywhere that interests you and see where it takes you. Alternatively, you can head to Chapter 3, which offers an overview of the process of raising funds.
Wherever you start and wherever you end up, I hope your business is the better for it.
Part I
For Dummies can help you get started with lots of subjects. Visit www.dummies.com to learn more and do more with For Dummies.
In this part …
Use your knowledge of business principles and cycles to give your business the best chance of obtaining funding in a changing and challenging economic environment.
Understand the stages and cycles of your business and how each impacts your funding options.
Lay the foundations to help you successfully raise funding for your business.
Assess your skills and readiness to go for and accept funding for your business.
Chapter 1
In This Chapter
Getting an overview
Laying down the fundamentals to funding
Measuring your business’s viability
Sustaining your business
When you’re embarking on the mission to fund your business, you need to carry out the same level of preparation as you would for any important mission: advanced reconnaissance, tactical thinking, logical planning for any eventuality – and add a large dollop of courage and confidence in the abilities of yourself and your team to survive and thrive.
You may have a fantastic business idea that you’ve nurtured, protected and evangelised about, but the fact is that however great you think your brain child is, it may never receive a penny of funding. Or it may be the exact opposite – and funders get your idea, think it’s a winner and pour money into it. But you now need to deal with all the challenges and responsibilities that getting funded brings.
The UK is currently experiencing a period of economic growth that surpasses that of the pre-2008 crash – unemployment is down, and tech businesses are the new black, receiving millions of pounds of investment from the four corners of the Earth – but the number of people choosing to go it alone is also up, and competition for all forms of funding is on the rise.
The unfortunate reality is that many new businesses don’t survive the first year, and many others don’t grow beyond a lifestyle business that generates enough income to let you enjoy a good standard of living but doesn’t aspire to ambitious revenue goals. Getting the right form of funding at the right time can be the thing that makes your business one of the winners in this competitive landscape. Equipping yourself with as much knowledge, awareness and resources as you possibly can will go a long way to helping you to determine your funding needs and to know when and where to go to look for the appropriate solution.
When it comes to funding, your bank manager is no longer your only option. Traditional funders are nestling alongside a new breed of alternative financiers challenging the status quo, and everyone is jockeying for position. It’s a brave new world in some respects, and it’s full of promise and exciting opportunities for your business. Technology has been a game changer when it comes to business funding, and it’s a constantly changing scene – whether it’s a platform, a crowd or a direct lending application. The supply of finance is now more diverse and accessible than it’s been in a long time, so explore, but proceed with caution and advice.
In fact, you can now find so many options to fund your business that you need to stay networked, stay alert and stay updated if you’re going to maximise the finance in your business and get it at a good price.
How you prepare and how you implement your funding plan can make the difference between success and failure. This chapter sets the scene to make sure that you’re well-prepared for the exciting, and hopefully rewarding, journey ahead.
When you’re consumed with passion and enthusiasm for your new business or growth idea, and you’re convinced that it’s as obvious as the nose on your face that someone just needs to throw money at you for it to be a huge success, it’s sometimes hard to see the bigger economic, business and funding picture that surrounds you. If you’re going to be a player, you’d better make sure that you know the rules of the game.
Establishing and positioning your business within your industry and giving it a loose, but logical, framework early on gives your business a structure to hold it together and to grow on. You can tighten and refine your structure as your business grows.
I’m not talking about constricting your innovative concepts into a box; I’m talking about keeping a loose lid on the box, so everything that’s good and useful doesn’t escape.
A framework helps you and your business stay focused and be clear about what differentiates you from the rest of the herd. It gives you an easily recognisable and understandable means of communicating within your organisation and to your financiers.
Recently a very well-known business investor asked me why Americans think a business plan is still relevant to a funding application; he doesn’t think they are. I didn’t hesitate for one second in saying, ‘Maybe it’s something to do with knowing where the business is going and showing an investor or a lender that you know’, which is what I genuinely feel. I also think a business plan helps you to get focused and – when used properly – to stay focused.
I’ve lost track of the number of times I’ve read or heard successful businesspeople harp on about the need for focus in order to achieve your goals and success. Sorry to disappoint if you were expecting me to say ‘Rubbish. What do they know?’ Because I have to agree, especially when it comes to raising money for your business. You need to be fully engaged with, and focused on, the process and achieving your outcomes with regard to both getting the funding and hitting all the targets and milestones linked to the money along the way. And sometimes, just writing the plan opens your eyes to the things you haven’t thought about or potential problem areas you overlooked.
As it is with anything that demands unbroken concentration, it’s not uncommon to lose your focus over time and have to rediscover what your core purpose is, especially if your funding is linked to this purpose.
In your business, focus takes on a number of forms, in both the business process as well as in your team. Maybe it shows up in pricing strategies, product differentiation or cost-cutting exercises, but it will always be something to keep your eye on. When you’re in the throes of running your growing business, it’s easy to take your eye off the ball or forget some of the reasons you did this in the first place.
Having a general understanding of the principles behind business strategy, and a focused idea of how strategy and business planning affect your funding efforts, is a good starting point in your preparation stage.
The next thing you want to do is go a bit deeper, and look at the drivers in your specific industry or sector. You want to be able to clearly differentiate yourself and see off your competition while simultaneously maximising opportunities in every area of your business – from supply chain to end-user. You want to keep as much cash in your business as you can while continually strengthening and monitoring the key performance areas that underpin your ability to successfully raise finance at all stages of your business.
As you consider your business sector, keep these points in mind:
And, no matter what sector you’re in, use these tips for success:
It’s okay not to be the first to the party, as long as you’re fashionably late and make a noticeable entrance. It’s no accident that you find sayings such as ‘fools rush in where angels fear to tread’, or that you can usually remember the runner-up in the talent contests and not the winner. Rushing headlong into a new business, or a new business area, without proper planning, preparation and funding, is a recipe for disaster.
Don’t feel the pressure to launch prematurely; it’s always better to learn from someone else’s mistakes, capitalise on his educating the market, and discover the ways to do it cheaper, faster and better by analysing his mistakes. Funders will appreciate your pragmatic and more mature approach. If, however, you’re the first to market and you fail, learn your lessons well and come back fighting.
The strategy of being first to market is often over-hyped, but of course you do see advantages: You have little competition, you can make a greater impact and you may become a household name. Think Ford and automobiles, Gillette and razors, Hoover and vacuums and Xerox and photocopiers. All these brands were first movers and spawned successful businesses and, in some cases, industries.
You do, however, have the burden of developing a market for the first movers – proof of concept, or being able to demonstrate that your idea is feasible and has business potential, can be painful and expensive, and sometimes you’re too early or just plain wrong.
If you don’t have the following, there really isn’t any point in crossing the finish line first:
In ‘The Half-Truth of First-Mover Advantage’, published in the Harvard Business Review, authors Fernando Suarez and Gianvito Lanzolla argue that first-mover advantage is dependent on the pace of the market and technology. A slow market is good for first-mover advantage; a rapidly changing market makes it harder to gain first-mover advantage. Think of Motorola and BlackBerry (first movers in a slow market), and then Samsung and Apple (who both surpassed BlackBerry in a fast-moving market).
You need to get in shape to start or grow a business. I’m not talking about going on a diet and working out (although I believe that a healthy body helps you perform better and stay focused) – it’s more about making sure that you have the skills and knowledge you need for your business, or know how to find and activate such sources of expertise.
You may not have all the skills, expertise and knowledge you need to run the business and raise the funds yourself. Chapter 8 introduces you to the myriad of agencies and advisers that can help fill in the gaps in your expertise.
Before you begin what will be a challenging and demanding funding journey, have a frank and honest discussion with yourself on the subject of your ability to actually start on this road and see it through to the end. Better to stare yourself in your internal mirror before you start than at some point down the line when you feel like you’re drowning and you’re looking for someone to throw you a lifeline.
Of course, you can’t know everything before you start – but knowing a good part of it, and also knowing what you don’t know, can be very useful. Address the following points before you set out:
Assess your skills and knowledge. Once you’ve determined the why, it’s a good idea to assess your knowledge and skills, because both will come into play when you’re trying to raise funds.
Make a frank assessment of yourself and your CV, and be brutally honest about your management skills, your financial skills and your industry knowledge. Identify any gaps or areas that you need to improve on or get help with:
Match your current skills and expertise against your necessary-skills list, and identify any gaps.
Decide on a way to plug any gaps, either with people, knowledge or expertise.
Ask someone you respect, like a mentor or an adviser, to help you identify gaps, offering an objective and unemotional opinion.
You also need to ask yourself if you want a lifestyle business that gives you enough money to be comfortable or a business that you can scale and make a great return on. The type of business you aim for affects the way funders see you and your business.
This soul searching isn’t meant to put you off. On the contrary, if you’re reading this book, you’re probably 99 per cent of the way to getting started on funding, whether it’s the start of your venture or further along. My aim is to make you think and take stock, plan and make any adjustments before diving in to a pool that has both dolphins and sharks in it.
Every time I experience poor customer service, excessively high prices or the lack of a product in the market, I hear a little voice in my head say ‘I could do that better’, or ‘Why don’t I bring that to the UK; there’s obviously a demand for it’. At some point, I ask myself how much money I’d need and who else I could rope into my cunning plan. Enthusiasm and blind ambition are admirable qualities in an entrepreneur, but your opinions are not enough to go on until you find out if there’s a real need for your fantastic solution.
Before you start asking for money to get your brilliant idea off the ground, ask yourself these questions:
You need to consider what drives people to buy into a product or a service, no matter what the cost, and then see if you’ve got what it takes. The reason may be:
When you have a good business idea and are confident that you have the skills and knowledge to make it a reality, you need to ask yourself one final, two-part question: Will this business suit me and my goals, and what am I prepared to live with in order to make it a success? This may also include the question: What am I prepared to ask my family to put up with in order to achieve my dreams?
For example, you may love baking biscuits at home, but would you love getting up at 2:30 a.m., abiding by strict health and safety regulations and relying on staff to get your biscuits to your customers every day, as well as making sure you can repay your loan or generate the return an investor expects?
Have a frank conversation with yourself about what it is that you want from embarking on this journey, and what you’re prepared to put up with – whether that’s working long hours, travelling, doing the accounts, or meeting with and dealing with people. Make sure that you and your chosen industry or sector are a good match. When you take someone else’s money, you can’t pick and choose when it comes to the tasks that get the job done.
In a well-known cartoon magazine, a cartoon shows two cavemen with a square wheel. The caption reads, ‘I call my invention “The Wheel”, but so far I’ve been unable to attract any venture capital’.
An idea or product that may be the basis for a business, however unique, isn’t a business in and of itself. A bare idea certainly won’t convince someone to give you money. It’s a great place to start, but before you give up the day job and raid the biscuit tin where you keep your savings, explore the steps in the following sections so that you don’t have to go crawling back to that job or live on bread and water.
Before you go forth unprepared and ill-informed and wind up speaking in broad brush strokes without really saying anything about the realistic size, characteristics, approach and financial return from your market, discover as much as possible about the market and put that knowledge into an intelligible format for funders. Don’t look for funding on the basis that you and a couple of your mates think you’ve got a great idea or ignore the glaring examples of those who have gone before you and failed, because this won’t wash with funders.
One of the best ways to explore your market is to conduct and/or commission some market research, using secondary sources of already published information, and primary sources of first-hand, fresh or new data that you gather from your potential market. Some things to look at include:
You can find additional resources in Marketing Research Kit For Dummies by Michael Hyman and Jeremy Sierra (Wiley).
You need to consider the whole of the market versus your share of the market. When it comes to funding, don’t talk about the universe if your business is concerned with only one or two planets in the galaxy. It just puts people off and tells them that you haven’t figured out how large your potential piece of the celestial pie is. Having a UK market of £5 billion is terrific, but if you’re only going after £1.5 million of that, why are you even talking about it like you own it? You need to drill down on which part of the market, at what spend, over what time frame is likely to be yours so that you can outline a realistic plan of attack.
You’ve sorted out the product or service, and you know you’re on to a winner. You’ve looked yourself, and your team, straight in the eye and seen your good and not-so-good points and put a plan in place for improvement. Now the question is: Can you raise the money to make this dream a reality?
Before you make one phone call or send one email to a funder of any sort, you need to do a few things first in order to make sure that your idea is financially viable. Some of the things to consider include:
I discuss financial documents and projections in Chapter 3.
Raising capital for your start-up is no mean feat, but it’s ten times harder if you haven’t done your financial homework and aren’t able to tell a convincing and realistic story. If you lack confidence or experience with any of your funding documents, do what you’d do with anything that’s unpleasant but essential: Get help if you need it, and then get comfortable with your documents and presentation. You need to be in control of them.
Broadly speaking, a business can access two different types of money at various stages on its journey – debt and equity. A third, lesser known option, alternative finance, has experienced explosive growth over the past few years, and is rapidly becoming more mainstream.
The basics features of each type of funding are:
Raising the funding you need is usually more challenging in the early stages of a business than in later stages. You may wind up asking yourself why you even started down this road in the first place on more than one occasion during the early stages. Fear not, intrepid entrepreneur, you’re not the first and you certainly won’t be the last person asking that question. If you’re on to something good and do your homework and preparation, you most probably can find and secure the funding you need. Be aware that funding may not come from the place you thought it would; it may also come with a few too many strings for your liking, but, hey, no one ever said this would be easy.
One of the things about raising money that’s often overlooked or ignored by entrepreneurs is just how long the whole process can take. Unless you have access to a very wealthy benefactor or have your own deep pockets, raising funds for your business can take months. You need to factor the time and effort into your plans and schedules. If you’re a procrastinator by nature, you may want to get someone who’s a bit more get it done now involved in helping you with the preparation.
When it comes to getting funding for your business, a business plan is still an essential. Along with the other documents I cover in Chapter 5, your business plan is your company’s calling card and road map. After potential funders get a taste of your funding proposal in your investment memorandum or your pitch deck, your business plan makes them want to come back for seconds. Any potential backer will ask to see the detail once the niceties are over.
Your business plan is a living document that needs updating as your business evolves so that you’re ready for every opportunity that comes your way. Fundraising can often be a time-consuming and lengthy process, and you don’t want to have to drop everything and write a plan from scratch or make major changes at the exact time you need to present it.
Your plan includes financial forecasts that you may need for a quick decision from a web-based funder, for example. You need it for different reasons at different times, but you do need it. It needs to cover three to five years, depending on the type of finance that you’re looking to raise, and funders should be able to see what’s in it for them in exchange for giving you the money.
Investors and funders of all kinds receive literally hundreds of business plans every week, so in order to make sure that they read and genuinely consider yours, it needs to stand out from the crowd. Some things to think about include: