When you are scaling up your business one of the most important elements to get right is funding. Without sufficient investment coming into the business at the right time, all efforts to grow it from startup to the next big thing will be thwarted.
The past few years have seen the emergence of several new funding options for growth businesses, so it is more important than ever to choose the right kind of deal for your venture. It’s also important that the availability of funding doesn’t lead to the wrong growth decisions being made.
Alongside the traditional routes of venture capital, angel funding, private equity and bank loans, growth firms now also have the choice of equity crowdfunding, which amasses small investments from many individual investors; peer to peer lending, which amalgamates small loans from many individual lenders; and even customer bonds, where customers lend you the money you need. All of these are increasingly creeping into the traditional growth funding space – crowdfunding platform Crowdcube for example has already funded a number VC-level deals of between £1 million and £2 million.
The first factor to consider when making a decision is whether your business only needs money to help it scale up, or whether it needs expert advice, mentoring and contacts too. Angel funding is typically offered by experienced business people so the mentoring role can be as valuable as the investment itself. Venture capital comes with much useful advice and contacts but can also come with tough love – if the management is not up to the task they may be shown the door. Equity crowdfunding, peer to peer lending and customer bonds come with no advice at all, unless you count the enthusiastic input of several hundred individuals keen to offer their unsolicited thoughts.
You also need to think about how long you will need the money for – and when you can realistically pay it back. Venture capitalists expect quick returns, typically demanding a return on investment after three to five years. Angel and private equity investors generally run on a gentler timescale of at least five to seven years, while equity crowdfunding comes with no timescale at all. Peer to peer lending, as provided by Funding Circle, for example, offers loan terms of up to five years, while customer bonds are usually fixed for periods of three or four years. If your business is at the stage where it needs the freedom to grow at its own pace, choose an option that gives you this flexibility.
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Make sure you understand your timing constraints too. Peer to peer lending can be arranged within a week and equity crowdfunding in the space of a few weeks, but finding the right venture capitalist, angel or private equity investor can take many months, or even years. Give yourself enough time to get a funding deal in place. If you leave it too late and run out of cash, you may no longer have a business to invest in.
One more thing to consider – equity crowdfunding is still in its infancy and although it has funded many businesses, investors have largely yet to see any returns. The valuations currently being placed on businesses are also extremely high, meaning any future returns may be small. Therefore there has to be some concern about how sustainable this model can be in the longer term. Already it is increasingly the case that ventures are having to bring along their own crowd of investors to get funding secured.
Finally, ask yourself if you do really need to get funding right now. Just because it’s available doesn’t automatically mean you should grab it. If your business is growing then the longer you are able to wait, the less equity you will need to give away for the same amount of investment. Also, growth plans should be established first, with the right funding being chosen to meet those plans rather than vice versa.