“What’s the best way to fund my business?”: Ten founders give the lowdown on the best way to fund your business

One of the fundamental questions at the front of most founders’ minds – and the most frequently asked question – is “What’s the best way to fund my business?” As part of Global Entrepreneur Week, Hatty Fawcett of Focused For Business asked ten founders who have raised investment for their businesses to share the pros and cons of different funding options.

A quick question to ask, but a complex question to answer. And, of course, it depends: On the stage of your business; your objectives for the business; your reasons for seeking investment; and the speed at which you require it. It will also depend on what you are willing to offer in exchange for investment. Will you sell shares in your business, for example, or are you looking for a loan which will eventually be paid back?

What is the best way to fund my business? Ten founders offer suggestions

Bootstrapping – a good way to get the business off the ground

Bootstrapping your business usually means funding your business with your own money to get if off the ground, and then continuing to fund it with revenue generated by the business itself. When I started my first business, I wasted a lot of time talking to potential investors explaining why they should back my business. At the time, “the business” was little more than a well-crafted business plan and financial forecast. I remember the moment when the “penny dropped” and I realised no one was going to invest in my business until I had actually created it and it was earning some revenue. That meant investing my own savings to get things moving. I had to put my money where my mouth was.

A big advantage of starting your business in this way is that you are in control of the business. It puts you firmly in the driving seat. When it comes to the direction you want the company to take, the key decisions are down to you.

Tim Martin, CEO of WorkInConfidence,  who bootstrapped his business puts it very succinctly

“You do it because you have to.  It means you can build value before funding and get it [the business] going.” 

Always assuming you have some money you can invest, there are some disadvantages to this route. Tim found

“You are often unable to make key decisions, such as spending more on marketing.”

So is bootstrapping the best way to fund your business? Be aware that a lack of money can slow down the speed at which your business grows.

Bank loan or Start-up Loan – a helpful cash injection to achieve an important milestone

Even a bootstrapped business will probably find there comes a point when you need a cash injection to achieve an important milestone. It might be that you need money to pay for tooling for product manufacture, or you need to purchase materials or premises in order to start generating revenue. If so, might start-up loans and bank loans be the best way to fund your business?

Jaya da Costa, Founder of Pause Cat Café, saw a number of benefits in going for a start-up loan.

“It gave me the opportunity to maintain my own vision for my business and was a quicker option.  I was asked to complete a business plan to gain funding, which has been very useful during the set-up and also since opening.”

One drawback of this route is that you will have to pay interest on the loan which, as Jaya highlights

“The repayments can take a big chunk of your cash flow especially in the early stages of your business, try to negotiate an interest-only period to help with this.”

Angel investment – investors bring not just their cash but their skills, experience and contacts too

Business angels (high net worth individuals who have very often run and sold their own businesses) do not expect an immediate return on their investment. They don’t ask for interest or dividends but want to see any revenue generated by the business put back into the business so it can grow faster. What is more, business angels bring not just their cash when they invest in your business, but also their skills, expertise and contacts too. They may also have useful sector knowledge which can help you grow the business faster than the cash injection alone would suppose. They often act as mentors and can provide practical help and hands-on support. Could business angels be the best way to fund your business?

Sue Frost, Co-Founder & CEO of Curamicus, discovered many benefits of this investment route

“We were fortunate to find business angels with a wealth of business experience in particular areas who were willing to share with us for the benefit of the business. The best business angels can become key people in your startup team.”

Jason Lowe, Founder & Director of FYB London, echoed this

 “As well as the capital investment, the most valuable advantage [of accepting business angel investment] is having an experienced business mentor to work with. They help you avoid common potholes and provide an outside view on long term strategy for scaling the business.”

One of the challenges of raising investment from business angels, as Sue points out, is the time it takes:

This route to funding can be very time consuming as [business angel] groups meet probably only once per month/quarter and they only see a handful of startup pitches per meeting. We found angels within these groups can be looking for specific kinds of businesses such as entertainment apps or traditional retail businesses [and this may not coincide with your business sector]”

Jason also pointed out that with business angel investment, although you benefit from mentoring and practical advice, you are also relinquishing some control in your business. As he put it,

“You may have to compromise on some of your ideas and plans to attract investment.”

It’s important therefore to find a business angel with whom you are aligned in terms of the strategic direction of the business. It also helps if you build good rapport, openness and trust.

Angels may be more patient than banks in getting a return on their investment but they will expect a return so you do need to offer a clear “exit”. Typically, this will involve selling the business in a 3-5 year time frame so that the business angels can sell their shares at a profit.

Crowdfunding – a good way to raise funds but also to test product demand and build brand ambassadors

On the face of it, crowdfunding could be the best way to fund your business. The media is full of stories of businesses raising phenomenal amounts of money in remarkably short time periods. And crowdfunding brings other benefits too:

For Kellie Forbes, Co-Founder of YUU World, crowdfunding proved a brilliant way to market test a new product and boost sales

“[Crowdfunding provided] amazing feedback regarding the new product. That’s been insightful. We know we have a desired product, but we now realise there is another way to deliver this – as an add-on option rather than a bespoke product. It was feedback by via the crowdfunding campaign that has caused us to re-think this decision. We have a better product as a result.”

Peter Ramsey, Founder & CEO of Movem, has done crowdfunding twice and he agrees there are benefits to crowdfunding above and beyond the money raised

“Crowdfunding gives you a lot of exposure…I know that our shareholders talk about Movem all the time, so there’s an unknown amount of network effect going on there. But that’s the biggest benefit, the exposure.”

Kellie Forbes also sees PR and marketing exposure as a big upside to crowdfunding

“Our sales are up almost 20% which is thanks to the crowdfunding campaign exposure.” 

Crowdfunding is not a quick route to investment.

There is a lot of work done behind the scenes to ensure a successful crowdfunding campaign. James Courtney, Founder & CEO of Lux Rewards, explained

“For early stage startups, it is very difficult to get viral spread like Monzo etc. managed to. Realistically you need to bring 50-80% of the raise through your own connections or angels.”

Peter agreed

“Crowdfunding isn’t as simple as just ‘making a video’. Months of work go into a pitch, and even before then you have to be pre-raising and getting momentum. My advice would be to be realistic on the amount of money you need. Raising £500k might sound glamorous and you might be pleased that you’ve got 3 years of money in the bank, but it’s considerably harder. Only raise as much as you need.”

Venture Capital – the holy grail of raising investment?

For some founders and entrepreneurs, venture capital (VC) investment feels like the holy grail of raising investment. VCs typically manage a fund made up of other people’s money. The funds can be large which means VCs are in a position to make big investments, and cash-starved founders may be tempted to see pound signs in front of their eyes. Perhaps this is the best way to fund your business?

VCs are also generally very well connected and, like business angels, they want to see the businesses they back succeed. Rajeeb Dey, CEO of Learnerbly, found he benefited from his VC’s network by being introduced to one contact who became CTO and another contact with very specific skills whose advice helped them develop proper, scalable systems. As Raj put it

“I’d [recommend VCs for their] connections and expertise…as well as potential business development connections.”

VCs are unsuitable for the majority of startups

As a general rule, VCs are looking for businesses which offer not just fast growth but exponential growth. They are often focused on particular sectors and industries, and have a preference for companies that disrupt the status quo, not just “me to” products. As a general rule they don’t invest at “seed” stage but will wait until the business has proved the market and is ready to grow. For all these reasons, VC funding is not the best way to fund every business.

VCs manage other people’s money, so they have to be ruthless in managing the investment.  This drives a different agenda and a certain amount of governance and bureaucracy.Raj at Learnerbly put it this way

“The amount of governance increases – ie monthly board meetings in our case – I doubt it’d be so frequent had we just had business angel [investment]. That said, I’m actually finding these meetings useful…it’s something to schedule, prepare for and ensure you are aware of the reporting/governance requirements VCs may have.” 

Harinder Sandhu, Founder of EmpowerRD wasn’t comfortable with “overbearing beaurocracy” and loss of control. She described her situation,

“I hadn’t appreciated the level of control the VCs would look to exert – they had a specific mould they were looking to shape each company into. I decided to execute a break-clause I’d baked into our contract to cut short the funding and therefore the VC’s equity stake.”

Thomas Beverley Co-Founder at Fy also felt uncomfortable with his situation

“The VC will typically be operating [on the basis that] ​‘one-in-twenty of my investments are going to be huge; 5 [will provide] ok returns and 15 [businesses will be] write-offs mentality’. [As the founder] they obviously want you to be successful but they have 20 bets to your 1 so [motivations] aren’t entirely aligned. Therefore, they might push you to do irrational things post investment.”

The consensus with regards to Vc investment is, before you take the money, make sure your motivations and expectations are aligned.  Taking references can be a good way of ensuring this

So, what is the best way to fund your business?

There is no one best option when it comes to funding your business. The best investment for your business will be the option that is right for your stage of business, your ambition for growth and what you are willing to offer to investors in return for their investment.

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If you want to know more about the pros and cons of different forms of business investment, why not attend the free webinar “What’s the best way to fund my startup- quickly?“. Find out more, see dates and reserve your place

How I proved my startup so I could quit my job and feed my passion

Anyone can come up with a “brilliant business idea” but it is quite another thing to put your money where your mouth is, take the plunge, give up your job and commit to making your idea a reality. For many founders of startups, taking the decision to leave your job – and a predictable salary – to commit to building your startup full-time can be terrifying. But it doesn’t have to be. There are steps you can take to prove you have a viable startup which reduces the risk, builds your confidence and makes it easier to attract funding.

David Toscano of Cin Cin Italian Bar & Kitchen did just that and Hatty Fawcett of Focused For Business asked him to share the steps he took to build his successful restaurant business – and what gave him the confidence to give up his profession as a lawyer to follow his passion for Italian food.

Hatty: How long had you been thinking about your business idea before you decided to take the first steps in getting your business off the ground?

David: About 10 years. I qualified as a lawyer back in 2001 but was bored of that career about two years in so I started to look for a way out. I spent a lot of time thinking I was not capable of doing anything else.

“I had always had a passion for food and when a friend left law to go into wine, it gave me that little bit of confidence that maybe I could have a second career in something completely different.”

Hatty: Who or what pushed you to take action in creating your business?

David:

“I just did not want to spend the next 20+ years of my life in a job I did not enjoy or care about. I needed to be putting my time and effort into something I had a real passion for”

Having grown up in an Italian family, food was always central to my childhood and something I had always felt comfortable with.

Hatty: What initial steps did you take and why did you choose these steps?

David: The very initial steps were saying yes to catering parties and dinners for family and friends in 2010, even though I had no chef training or experience.

“I did a lot of research about opening a restaurant and quickly discovered it was an enterprise with a high set up cost and high risk of early failure. Given I had never even worked in a restaurant before, this made the jump to restauranteur feel even more precarious.”

So in 2012, I bought a vintage Fiat van and converted it into a street food van which in 2013 I launched as Cin Cin, an Italian street food and event catering business. I started trading at festivals and fairs, as well as taking private bookings to cater weddings, parties, celebrations; all while still working as a lawyer in London.

“Testing my offering in this way was very low risk because I was not reliant on income from the new business to pay my bills and I had set up the business with my own funds.”

I was also aware that I was moving into a completely new sector that I had no experience in so I had no idea whether I would even enjoy working in food & drink. Thankfully, I immediately loved it!

“I spent 2013 testing the business in various street food and private catering events, doing all the cooking myself and calling on family and friends as staff.”

 I was enjoying event catering and starting to pick up bigger events which meant I was turning some good profit but by 2014, I was sure that I wanted to open a restaurant so started to look for a chef to work with to put on supper club/pop up restaurant events. This was because I wanted to take the food beyond the limitations of the van and make the Cin Cin offering more refined. That summer I met Jamie Halsall, who is now my head chef in the business, and we started putting on supper clubs in Brighton, London and Kent. This step helped bridge the gap between the van business I had started and the restaurant business I wanted it to become.

Hatty: What did you learn by taking these initial steps?

David: These initial steps allowed me to test the development of the offering in low risk scenarios – I was still working as a lawyer so was not reliant on the income from the fledgling business to fund my lifestyle.

“I still approached each event with the aim of making a profit, but at that stage it was more about getting feedback on what customers wanted and expected from a new restaurant and more importantly, their feedback showed me that there was a gap in the market that we could fill.”

Hatty: Was there a specific event or turning point that gave you the confidence to commit working full-time in your business?

David: In Spring 2015, the business had grown to the point where I no longer had enough leave days from my job as a lawyer to cater all of the events I was being offered.

“I was turning down work and was extremely tired given I was using all my leave for events. So I made a plan to quit law at the end of 2015 and chase my restaurant dream full time. I have never looked back.”

Hatty: What influenced your decision to raise investment?

David: I opened my first restaurant in November 2016 with my own funds. It was a small 20 seat restaurant, all housed in one room which meant the set up costs were relatively low. By Spring 2017, we were constantly full so I began looking for a second larger restaurant site.

“I needed the investment because I could not grow the business without it. While there was cash in the business given the success of the first restaurant, I did not have enough to build and open the second larger site so I raised finance through a mix of bank finance and asset finance on the new kit we needed to open the new restaurant.”

Hatty: Did the steps you had taken to prove your business model make it easier to raise funding for your business?

David: Absolutely. As above, I used the Enterprise Finance Guarantee [EFG] scheme to access bank finance because the business did not have fixed assets to borrow against. In order to access that finance, I had to submit a business plan with costed financials to show that this step to growth was sustainable.

“All of the testing of my business model and offering went into that business plan and was a key part of the data that convinced the bank and asset finance agency to lend me the money I needed.”

Hatty: Do you have any advice or tips for entrepreneurs thinking about starting their own business?

David: Lean testing – there are a lot of ways to try out what you think you’d like your business to be without risking your personal finances with a loan or spending a lot of your savings. But just as important is that it’s also the best and least risky way to get feedback from potential customers about whether your business model and offering is actually what people want. Be prepared to listen and adjust your offering to suit the market.

Passion – I worked hard to become a lawyer but never had a passion for it. Working on something you do not care about is a recipe for mediocrity or even worse, failure.

“So if you are going to start a business, make sure there is something within it you are passionate about. That passion will drive you through fatigue, disappointment, and little failures while also making success all the more sweet as you’ll have created something you can be proud of. And isn’t that why we become entrepreneurs in the first place?!”

Do it now – you can come up with a million reasons why you should not to take a chance on starting your own business or pushing it forward. I spent the best part of 10 years telling myself I could not do it. But rather than saying ‘I wish I’d done it earlier’, I have always just tried to grow the business day by day and make decisions for growth as promptly as I can.

“There is no point waiting around wondering whether you could be great at something. Do it now.” 

Read more interviews with Founders

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Three questions to answer to ensure your business is ready for investment

So you want to raise investment? Rather than leaping straight into action writing a pitch or talking to investors, take a moment and ask yourself three questions.

How much money do you need?
What will you do with the money you raise?
How will your business change and grow as a result?

If you can answer these questions properly – not just in an off the cuff manner – but by providing real detail, facts and figures, then you probably are ready to raise investment.

But the devil is in the detail.

Investors don’t back ideas, hunches or broad-brush thinking. They want proven products (or services), thoughtful plans and evidence to support your approach. These things aren’t just conjured up by brainstorming, desk research and theoretical plans. They are created through action, hard work, persistence and a lot of iteration.

I touted my theoretical business plan around VCs and angels before the penny dropped that I needed to get the business going before anyone would back me.

I learnt that the hard way. I touted my theoretical business plan around VCs and angels before the penny dropped that I needed to get the business going before anyone would back me. The next time I tried to raise investment, (just six months later – but six incredibly busy months) I had not just a web platform but paying customers and a detailed marketing strategy. I raised £150K in one week – from pitching to money in the bank.

The proof was in the pudding. Investors call this “traction” and it speaks lounder than words.

Traction speaks louder than words

Be honest, ask yourself what stage your business is at:

If you have a business idea but nothing tangible yet, don’t waste your time talking to investors. Instead invest your time into creating your product/service/app. It doesn’t need to have all the bells and whistles but it needs to deliver the essence of what customers are looking for. This is often called an MVP or minimum viable product. It allows customers to trial your product, give feedback and for you to understand what needs to change to meet your customers’ needs better.

You don’t have to spend a fortune to develop an MVP. In fact, it’s better if you don’t

How do you fund this? Invest your own money (if you can), talk to family and friends to see if they will lend/invest money or explore a start up loan (but be aware that you will probably have to start making repayments immediately so be sure you can generate revenue quickly or negotiate a repayment free period). You don’t have to spend a fortune to develop an MVP. In fact, it’s better if you don’t – the chances are your MVP will change when you get customer feedback.

If you have got an MVP, focus on getting your first customers – whether they are paying you or not. Being able to demonstrate you can attract paying customers is best, but honest – hopefully positive – feedback can be just as valuable. Work on really understanding your customers – who they are, why they like the product and how you could find and sell to similar customers. This information is gold dust for your marketing strategy. Tried and tested marketing strategies do attract investment.

Work on really understanding your customers…Tried and tested marketing strategies do attract investment.

And then? Well, it’s back to the three questions we started with. To gain investment, you will need to explain in detail how much money you need, what you will do with it and how that will grow your business.

Growth is the key here. Investors don’t want you to stand still. They want you to create value by finding better ways to work, developing new products, attracting more customers. Investment isn’t philanthropy. Investors want a financial gain and that is created when the business grows – fast.

Investment isn’t philanthropy. Investors want a financial gain and that is created when the business grows – fast.

If you’d like to speed up the process of getting investment, it’s worth talking to a professional. Someone who understands the process, someone who has “been there, done that”. Investors are looking for specific information when deciding whether to invest and it pays to get the inside track on what you’ll need to provide – as well as having someone to help you prepare, to challenge you and give practical advice on how to improve your pitch.

If your business is ready for investment, sign up to Fast Track to Funding – designed to save you time and make it quicker to attract investment.

If you’re not sure if your business is ready to raise investment and you want to learn more about your funding options, reserve a free place on the live and interactive webinar “Everything you need to know to raise funding – quickly”