Working job-to-job and contract-to-contract is all well and good, but if you want to build a business you’ll need to find some cash.
Christian Nellemann, founder of XLN Telecom, and shares some of his experience on how you could get your business off the ground financially.
I started my business using my own money and as it grew, friends and family invested small amounts. As my experience grew I realised that the easy thing to do was give away what could turn out to be more equity than the capital warranted. As I have launched more businesses I have tried to ensure that capital was more structured and better thought through, and that shares reflect the contribution to the business rather than the capital required to establish the business.
For new business start-ups, private resources – friends and families, even committed suppliers – are the best start place for seed capital. Often you can get this money on preferential terms and without fixed payback periods. It’s important to make sure that everyone is clear about what goes in, in what circumstances and when it is returned. You need to have something in place in case the return cannot be as agreed.
To make yourself attractive as an investment you need to plan, prove and show commitment and expertise in your sector. Be honest, passionate and hard working. Plan not just for success but also for setbacks, so what happens if that big promised order from a major retailer doesn’t come through, or if a key supplier insists on payment up front? Plan well and assume nothing in that planning. Get in touch with Business Link and anyone else you think can help. Do your research and understand what you need and why. Remember that investors are NOT there to pay your wages, but to seed the establishment of a new and hopefully profitable business. Be honest in your business planning and be on top of your cash flow.
One of the biggest mistakes start-ups make is giving away too much equity for start-up capital. This results in the key stakeholders getting squeezed when additional capital is required to make the business grow. Borrow money if you must, but don’t give away equity as you may regret it and have nothing to offer on to investors that can fund the rapid growth of an established and successful business. It’s important to ensure initial investors understand the risk as well as the reward.
It’s very easy to ask for too little money. Of course it makes you more attractive to initial investors and you are trying to make the decision easy for them. However, it’s harder to go back for more, especially if you need it to hit your original target simply because you didn’t plan in depth or overlooked the obvious. The capital to grow is a different matter and that reflects a higher degree of risk and involves private investment rather than venture capital.
The number of investors you have is less relevant than the level of control. If you don’t want them to have some say in your business, don’t borrow money. It’s as simple as that. Keep the number low if you can – more than one but less than four. Be clear about how decisions will be made before the investment and, above all, be honest every step of the way. If things are going well or badly, ensure you keep the investors informed but don’t go running to them with tales of woe every time something goes wrong (and it will). They are backing you and your business and they expect you to work hard, succeed and protect their investment in you.
The Government and some NGOs have attractive start-up schemes in certain sectors and areas. These offer everything from mentoring and training to low-cost premises and support services.
Unfortunately for many small businesses, banks are the lender of last resort. They are worth sounding out as they are pragmatic, business-focused and de-risked. They make a good sanity check and will guide your business planning.
