Perhaps the most frustrating thing about having a good business idea is lacking the funding to turn it into a reality.
Yes, it is true that many of the biggest businesses in the world today started out with no money, a motivated owner or owners and a wing and a prayer. The one thing they all have in common is: they all got investors to help get them where they are.
However, you may find yourself in the situation of having a good idea which requires a reasonably significant investment just to get it off the ground. If you are finding yourself here, then you are not alone.
Equally, you may have got through the first stage. You may have managed to found the business, get some meaningful steps completed and perhaps even started trading, but now you need the investment to give you the marketing budget to compete in your new arena.
Whichever situation you find yourself in there are few options you can explore and a few avenues you can go down in order to get that all important cash injection to kick-start your dreams.
Investment Options
There are a plethora of ways to secure investment into your business. Each of these can give you vital financial resources, allowing you to take steps, make decisions and bring in skills you would not otherwise have been able to.
The most common ways to raise funding are:
Equity Investment
This is probably the best-known investment option, but it is not necessarily the best or the right one for your business, but it could be.
Equity investment is the Dragons’ Den-style approach. You sell a percentage of your business to an investor or group of investors who then become a board member (or members) of your company.
- The Pros
There are a number of upsides to this method of investment; not least among which is that you are getting a motivated, invested and typically well-connected and/or highly skilled business partner stepping in. They have skin in the game, they want the business to be successful because their upside depends on it and they can potentially open doors for you that would have been firmly closed without them. They often have years of experience, vast resources, and powerful connections – all of which are then added to your business’ arsenal.
- The Cons
There are of course downsides, first and foremost being, yes you are having to give away a percentage of your company to another person (or persons). They are going to want a say in how the company is run, even if they do not have a controlling interest, they have voting rights and will be looking to protect their investment. There is often the fear than they will look to squeeze the founder (you) out and take control of the business for themselves.
- The Realities
In reality, this kind of investment generally comes in as a second round. Investors often prefer to put money into a business that has at least gotten off the ground.
Despite the popular fear, very few of them are out to seize control of businesses and wrest them from the hands of the founders. This just is not in their interest; it is far more profitable for them to invest into businesses that they do not have to run themselves.
Equity investment is what gave companies such as Amazon, Facebook, Google, Uber and Netflix (to name just a few) the leg up they needed to become world-dominators and it could do the same for you.
Crowdfunding
You may or may not have heard of crowdfunding. Simply put, what you are doing is looking to get a large number of people (the crowd) to each put in a small amount of money (funding) in order to total up to a significant amount of money. This is money you can then use however you wish in your business.
There are two main ways this is done, the first is what is known as traditional crowdfunding which gives no shares or any kind of ownership, profit share or other success-linked return to the people who give the money. You offer non-monetary rewards to the funders instead, such as being in any videos you make, or having their picture on your website, getting invited to the launch party, etc.
The other way is shareholder based. This allows them to purchase a limited number of “B” shares in the company (B shares are categorised as non-voting shares). This means they get to participate in the future success of the business and earn back on profit dividends, but they have no voting control over the business.
- The Pros
The main pro of Crowdfunding is that you do not have to give away any control of your business to anyone else. You gather a large number of interested people, all of whom like your idea enough to give some of their own money to help make it become a reality. This makes them prospective customers as well as advocates who will likely tell their friends and families about the business, meaning you expand your network of prospects exponentially.
- The Cons
Crowdfunding is hard work. You have to have some money to invest into advertising the campaign, you will need to whip up excitement on social media, send out flyers, emails, adverts, shoot videos etc, all in order to get enough people to put in enough money for you to hit your funding target. Many of the crowdfunding platforms out there will pay all the money back to those who pledged if you do not hit your target. Meaning you could have done all that work for nothing.
- The Realities
In reality, traditional crowdfunding is more likely to work for an idea that has a large public incentive. In other words, a product (digital or physical) that is consumer-based and will obviously benefit the lives of possible hundreds of thousands is likely to gather momentum and inspire members of the public to be generous and give their money.
Under the shareholder model it is easier to get people to give more, as there is an obvious upside for them, but you need to make sure you have robust shareholder agreements in place and that you do not allow them to sell out too early.
Crowdfunding can work well for some businesses, regardless of what stage you are at, but be aware that it is not just a button clicked online after which you can just wait for the money to roll in, it requires a lot of input and can fail.
Consortiums or Partnerships
A lesser-used method, consortiums or partnerships basically involve the founder or founders (you) being prepared to give away a percentage of your company’s ownership to friends, family, colleagues or partners. In return each member of the consortium puts in a set amount of seed money, combined together it is the hope that you will have enough to get started.
- The Pros
If you already have a good network of people, people who would have a vested interest in the success of your idea, then you can offer them the chance to be involved in the potential profits. This can raise you a good start-up pot quite quickly and allow you to get off the ground far quicker than you might otherwise have been able to and you do not have to run a crowdfunding campaign or prepare detailed investor documents
- The Cons
The main downside of consortiums is that you tend to immediately inherit a large body of people all wanting to know when they are going to get their money back. Each of them will have different ideas, different issues, problems, objections, and gripes and each of them will believe they have an equal right to interject and make demands. Groups of them may even team up to apply pressure and it is quite common for them to argue amongst themselves.
- The Realities
In reality, consortiums can work, but only if truly clear and stringent rules are put in place at the outset. They are rare however and for good reason, the list of cons can quite easily outweigh the pros.
Consortium businesses rarely stay that way, within a short space of time the consortium members are usually bought out, consolidating control with the original founder(s).
Summary
You can of course do all of the above, combinations or find other routes to gain funding, these are just the most common.
Under each scenario it is highly advisable to seek legal counsel and ensure shareholder agreements and company constitutions that protect the founder(s)’ interests are in place.
It is also important to consider and choose the right method(s) for your particular business idea. Choosing the right investors, the amount of investment you need, the amount of equity you’re prepared to give up and the way you’re going to use those funds is absolutely paramount and is vital to get done before you start looking for that investment.
The Altitude Agency specialises in preparing businesses and start-ups for investment, to find out more please contact us today.
For more information on getting your app idea funded please get in touch with us today on 0203 150 0565 or drop us an email at info@thealtitudeagency.com.
