Things you should know about finance, risk and reward

By: Chris Barling

Date: 30 March 2011

It seems to always be true that the only time that it’s easy to raise finance for a start-up is when you no longer need it. That’s certainly been my experience.

Over the years, I’ve raised money from family and friends, personal savings, government grants, business angels, venture capitalists and going public on the stock market. I’ve only ever once sought a loan from my bank and been offered it, but I turned it down.

I’ve also been an investor in a number of companies, with good and bad results. Here are a few thoughts that result from my experience on the whole process of raising money…

There are two factors involved when anyone decides whether to invest or lend you money – risk and reward. If you want to raise money, think long and hard about how you can persuade the potential source that the risk is low and the reward is likely to be high. You also need to think this equation through for your own personal well-being. If you have no idea of the risk and no plan should the business fail, you’re probably not realistic enough to start a business.

If your start-up is unproven, any bank finance isn’t that appropriate and if available, it will most likely be tied to a guarantee against your personal assets – which means you are the one taking the risk. It’s bad enough if your business goes bust, but losing your house too can turn it into a personal disaster. If you’re considering going down this route, think about selling the house, investing the money in the business and renting or remortgaging your house. When you do the sums, it will probably be a much cheaper source of finance, while having the same risk profile.

The time when bank finance, or finance from someone such as Lombard makes more sense is when the money will be used to purchase tangible assets, and the source of finance can take a charge on these assets.

If you have prosperous friends or family, they might be able to lend you money or invest in your business. Remember, though, if the business fails the result can be damaged relationships – and that might be a risk not worth taking.

Business angels and venture capitalists want the same thing as we all do – a risk-free, returns-rich opportunity. While this doesn’t really exist, you need to form your business pitch to get as close to that as possible. Don’t sell your proposition like you would to a customer; instead paint the picture of why and how they will get a major return. You can find lots of potential sources of finance by searching for “Business Angels” and “Venture Capital” on Google.

For a start-up with a strong offering, crowd funding is another option. It’s where you pitch your business proposition to the general public and build the capital you require from lots of small investments. Look at sites like KickStarter, CrowdCube and RocketHub to find out more.

Raising money is usually a frustrating experience, where persistence and hard work are the keys. Good luck with your fundraising – it can be the key to major growth and success.

Chris Barling is Chairman of ecommerce software supplier SellerDeck


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