It’s not just about having the idea, the courage to pursue it and the organisation to make it real, to start a business you also need cold, hard cash. But how do you get it?
Even at the best of times, banks are wary about backing early-stage businesses. But in these difficult times, despite plenty of hyperbole and high hopes, the chances of bank funding remain prohibitively low.
TV shows such as 'Dragon's Den' and 'Be Your Own Boss' show successful entrepreneurs dipping into their pockets to back great business ideas – but in everyday life, the chances of getting a retail magnate or smoothie millionaire to throw money at your fledgling start-up are few and far between.
And the lack of funding is doing more than just holding back business, a report by Viking found nearly one in five small business owners have had to sell or remortgage their home to find enough money to start or run a business.
So if Britain is going to turn itself into a nation of entrepreneurs – rather than bankers, accountants, lawyers and shopkeepers – where is the money going to come from? We can’t turn ourselves into the innovation capital of Europe without the capital and nobody wants to risk the roof over their family’s heads on a dream if they can possibly avoid it.
The good news is that, even though money doesn’t grow on trees, seed capital is beginning to blossom – if you know where to look for it.
In with the crowd
Depending on what you believe, crowd funding is either about to shake the very foundations of business or it is just a fad that is bound to fade. The concept is a relatively easy one to appreciate. You put your business or product onto one of a growing number of crowd-sourcing sites and ask people to back you with largely altruistic donations – and a growing number do exactly that.
The launch of Kickstarter in the UK has kick-started the debate on the importance of crowd funding. Since its launch in 2009, Kickstarter has hosted more than 70,000 projects. About two fifths of these have been funded – raising more than $345 million for entrepreneurs.
Businesses or individuals pitching on the site typically offer a range of perks in return for money. Pledges can be anything from £1 to thousands of pounds. Success stories have become legendary. For example, video games console Ouya raised $8,596,474 after initially asking for $950,000. Or the TikTok project that allowed people to turn their iPod Nano into an interactive watch and entered the Kickstarter hall of fame after aiming to raise $15,000 and ending up with more than $942,000.
But there are signs that Kickstarter could start to become a victim of its own success. For example, one high profile video game project, Haunts, recently stopped production after its development team quit, forcing the company behind the project to apologise to investors.
Nevertheless, crowdfunding is on the crest of a wave at the moment, with sites like Indiegogo also proving popular if you have a product to sell. If played right, a good crowd funding project can help prove the popularity of a product, as well as providing some much needed cash.
Riding this wave are a growing number of new crowd investment services. Instead of getting perks, would-be investors can buy a stake in the business.
Services like Crowdcube, Seedrs and newly launched Bank to the Future allow investors to back businesses they like, with anything from the price of a modest lunch upwards.
Yes, these are high-risk punts on early stage investments (and investors need to be aware of this and educated about the risks) but, over time, these sort of crowd-funding services could attract an entirely new crowd of investors, venturing where business angels have previously feared to tread.
Talking of angels – there is a quiet revolution going on, away from the prying eyes of the 'Dragon’s Den' cameras.
Supercharged income tax and capital gains tax breaks (in the form of EIS and SEIS for early stage investors) have helped lead the charge. This has made it far more attractive for wealthy individuals (or so-called angel investors) to back young businesses.
Using family, friends and your wider network to find potential angels can be a good start. But, remember, it is always smart to seek out smart money – somebody that can bring help, contacts and expertise, as well as cash.
Alternatively, angel networks - such as Envestors.co.uk, Beerandpartners.com and London Business Angels, give access to their own bank of potential investors. US originated Angel List goes for the online approach of connecting interesting companies with interested angels.
Don't take funding for granted
No company should take grants for granted. Yes, they can be time-consuming to apply for, but there are a growing number of funding sources available if you can find the right targets to suit your business (always remember to look at the criteria carefully before putting pen to paper).
Good research websites including www.J4b.co.uk, www,fundmap.co.uk and www.Grantfinder.co.uk. The Technology Strategy Board and Nesta are two organizations that pride themselves on backing British innovation.
Specific new funding schemes such as Start up Loans - which seek to back young entrepreneurs – are also regularly springing up.
So, too, are social impact funds which back enterprises that have a beneficial impact on society - such as Nesta’s new Impact Investment’s Fund and UnLtd’s Big Venture Challenge.
And don’t forget big business – which has become the big trend in business funding over the last few years. Innovation departments of corporates are increasingly looking at making strategic investments in entrepreneurs to bring innovative R&D and talent to accelerate growth in their organisations.
Throw in a growing number of accelerators – which put in seed money and expert help into typically technology-based businesses to speed up their trajectory – including the likes of Seedcamp, the Wayra, the Accelerator Academy and Springboard. Add in a good dollop of university-based incubators and spin-out departments. Then a pinch of sovereign wealth funds – state owned funds looking to diversify their assets. And you are beginning to create a recipe for entrepreneurial change.
Cash is king
There are also a growing number of innovative services for those businesses that have got past the early stages to get some traction and sales, but need cash to get to the next stage.
Funding Circle is an online marketplace where people can lend to businesses. Services like Market Invoice are a new alternative to the opaque world of invoicing discounting and asset financing. Funding Options is a new service that aims to make access to multiple financing options easier by getting the information and application right from the start. All are great initiatives to be applauded - and the first step towards closing the funding gap.
So far, the revolution in business funding is a drop in the ocean for the economy as a whole – an economy where the banks still reign (if not supremely). But change is coming and it can only be change for the better.
Andy Yates is an experienced entrepreneur, business mentor, advisor and angel investor and helps a portfolio of exciting growth businesses reach their potential including Huddlebuy, Europe’s largest business money saving website. Follow Andy on Twitter: @smallbizhelp Follow Huddlebuy on Twitter: @huddlebuy