In my previous post, I discussed how difficult it is for small companies to raise capital from traditional banking routes or using UK Government backed schemes.
I stressed that the UK Government and the banks are collectively failing to address the funding needs of small businesses which are the lifeblood of the economy.
So, is everything doom and gloom?
I do NOT think so. There are sources of finance available to small businesses and most encouraging of all is that more of these are becoming available through the internet.
Role of Angel investors and High Net Worth Individuals “HNWI”
Across the UK and the USA there is an army of low-profile Angel Investors and HNWI who are providing their own capital to finance small businesses in return for a share of the equity in these businesses. This is not without risk for these investors. The risk includes not only business risk but the risk of being diluted by later investors or in the worst case being “crammed down” by later stage investors who use dilution as a tool to reduce the percentage holdings of the earlier investors.
These investors have both liquidity and experience to make investments and for the most part are investing their own capital. You need to ensure that they are someone you can work with so personal chemistry is important.
There are many Angel networks which can be found through the Search Engines. I would recommend that you find networks which are local to you as Angels tend to invest in businesses that they are close enough to visit on a monthly if not a weekly basis. As a UK example of an internet platform, I have been recently using The Angel Investment Network which can be found at http://www.angelinvestmentnetwork.co.uk. (Full disclosure: no financial relationship exists between myself and this network).
In the US, AngelList is one of the leading Angel networks. It can be found at http://angel.co/. To learn more about AngelList, I can recommend a great interview by Andrew Warner from Mixergy where he discusses with Naval Ravikant, cofounder of AngelList how an Entrepreneur can use Angel List to raise money for a startup. The link to the page also includes a transcript of the interview.
The internet is also an excellent platform to arrange crowd sourced finance for small companies. At present this is largely restricted to debt rather than equity as current legislation makes the raising of equity by this route both complex and expensive.
Crowd Sourcing enables a person or a business to post a request for a loan or finance and enables many potential lenders to offer to fulfill that need in whole, or normally, in part. The platform manages the process, taking a small fee in the process. The borrower then pays interest and principal back to the borrowers over time, with the platform managing the cash flows.
A key component of crowd sourcing is the quality of the opportunities and legislation is primarily designed to protect the unwary and unsophisticated consumer from investment offers which they may not understand and which, if not carefully vetted by experienced professionals, may not be of sufficient “quality”. That having been said, crowd sourcing does offer a direct means to obtaining finance for suitable businesses which by-passes the banks.
A good UK example of this is Funding Circle which can be found at http://www.fundingcircle.com/. (Full Disclosure: I have no financial relationship of any kind with Funding Circle). The critical factor to success for such a platform is that they carefully vet all loan applicants and keep the quality high.
I know Funding Circle has such a vetting process and has been successful to date. Please note this does not amount to a recommendation from me for the platform, I only wish to cite it as an example.
Lean Start Ups
I have mentioned Eric Ries’s book – The Lean Start Up – How Todays Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (Amazon affiliate link) – before in my posts.
You can learn more about this at his site Start Up Lesson Learned at http://www.startuplessonslearned.com/ and the Lean Start Up website is here – http://theleanstartup.com/. Andrew Warner has also interviewed Eric Ries on Mixergy (well, I think Andrew has interviewed just about everyone on Mixergy 🙂 ) here at http://mixergy.com/eric-ries-lean-startup-best-seller/
The essence of the Lean Start Up Movement is to start small, create a minimally viable product, prove the product with early sales and continuously test and innovate. This has the key advantage of greatly reducing the start up capital required and keeping more of the equity in the hands of the founders.
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