Getting your business financed
Starting businesses rely often on personal savings and capital as provided by family members to develop their initial ideas. Next government programs and tax reduction schemes are relevant to (techno) starters. However, these programs are often not adopted by starters due to the administrative burden of filling out all kind of forms, the need to formalize practices and the urge to make the earnings rational explicit while these are not yet evident. Moving from early ideation phases to formalization of the business model is often cumbersome. Moreover, government programs force the starter to formalize what is intuitively obvious for themselves, take a lot of time and the upside is not always clear. So what are alternatives for finding additional funding?
Formal investment route
Formal investors like banks also force starters to be explicit about the business idea and business case. Banks are not always considered to be very supportive seen their risk avoiding behaviour. Banks require a proven track record and manifest entrepreneurial capabilities. Two elements that starters seldom can show. Moreover banks are getting a large number of business ideas and proposal every day, the costs for banks to process these applications are high and as such the starter has to really show a considerable volume (at least 20 mln €) in order to be interesting for banks. An investment that starters seldom ask for. Banks also prefer proven technologies. Moreover, the short time to market that start-ups want to realize to commercialize their products seldom fits the laborious and cumbersome procedures of banks. However, over the last decade banks have become more aware of these issues and try to accommodate starters in a more positive way.
Crowdfunding as alternative
Some banks explored crowdsourcing as an instrument for funding start-ups. Crowdfunding have been an interesting alternative to fund almost everything from start-ups, via basic incomes for people to even successful cycling teams who can no longer find a big sponsor (e.g.Cannondale). Start-up companies that looked for crowd funding when it was still a novel approach, not only succeeded to raise money but also the novelty contributed to their reputation. Nowadays crowdfunding is due to its broad acceptance and the much broader focus not that effective anymore. Although crowd sourcing is often the last resort for start-ups to avoid bankruptcy as we have seen in a number of cases.
Business angels & venture capitalists
So the best bet for starters looks to be business angels and venture capitalist. Both are more able to co-create a company and to support the starters. They also understand the lingo of starters better due to their own experience as a starter or by being involved in advice to start ups. Therefore they are more aware of the many pitfalls and problems starters have to deal with. They recognize if the team around a starter has potential. They know, based on their own experience, how to recognize an entrepreneur and how it is to work almost fulltime. They know what personal costs like burn out, divorce and insolvency are, while the outcomes are uncertain. However, be aware that although there are great success stories, at the end about 60% of starters backed up by Venture Capital go bankrupt and if successful a founder often owns less than 4% of the stocks in his own company. So it is important to ensure that starters are able to develop their ideas in a coherent way in order to convince business angels and VC and to reduce the amount of failed start ups
A solid business model makes financing your business attractive
Although entrepreneurship is key, it helps starters to be aware of strategic options, business models and how to develop them in an agile and flexible way, and to test ideas in a critical way. Creating a solid business model and business plan is a necessity to create a cash flow or to make your company attractive for investors, whatever mentioned option, banks, angels or VC, you want to pursue.The businessmakover.eu platform can be a helpful asset for this, just as the MooC courses related to the platform (see under ‘Learn’ at this webpage).
The basics of business modelling & finance
If you are interested to find out more on business modelling and finance, be welcome to join our webinar on The Value of Business Models, in which the role of investors and BM thinking will be highlighted. The webinar will be broadcasted live online on September 11th at 19:00 CET. You can register here:
Meet you then!