Category Archives: Starting a business

Types of Business Funding

Seed money

Do you need funding?

Start-up businesses often think that they need to find an investor. We only have to read in the papers about the latest internet billionaire to know that big funding means big success.

Yet most businesses can get going, or even grow without external investment. It depends on the amount required to gain entry into your market and whether you have sufficient funds to make a start, perhaps growing organically through sales.

The injection of funds into a business can however jump-start a project, or allow a more rapid growth. So if funding is desired it’s useful to think about the options for doing so:

Investment cycle

There is a natural progression of how a business is funded. Initially it may be that the business is financed by the owner or by approaching family and friends. This may be sufficient by itself for your business.

Alternatively, or perhaps as a follow-on, a local bank might be approached. Although nowadays these have been less helpful for young businesses, so after proving the concept, many tend to seek business angels.

At the next stage beyond this, venture capital firms might be brought in. Few companies go straight out and raise multi-millions; those that do are often high-tech businesses with known entrepreneurs, or ground breaking technology.

Types of funding:

Self-funded
Traditionally the way that the majority of businesses get going. For further investment it also shows your commitment in that you have put your own money into the concept and is invaluable in gaining that first bit of traction that Investors look for.

If the start-up business is taking the form of a partnership it will need to be made clear in the partnership agreement exactly how much of the funding each partner is providing and whether this entitles them to a greater or lesser proportion of the partnership profits. See Partnership Agreements

Loans
Banks will normally only loan money against you having security to offer. These may be assets of the business or personal assets such as your house. They are not entrepreneurial and don’t take risks based on you having a good idea.

Many Business Angels will include a loan in addition to purchasing equity in the business as part of the way in which the funding deal is structured.

Private equity funding
This is the generic name for sources of funding, normally in exchange for equity in the business. It includes both Business Angels and Venture Capital companies. People sometimes confuse the two. The differences are:

Business Angels

Anything from £1000 to £1M (although that would require several banded together).
Will look at start-ups and young businesses
Since they are investing their own money they can take more risk.
Often want to contribute knowledge or contacts

Venture Capital

£1M plus (normally)
Not for start-ups or just at idea stage
They are investing a fund comprised of other people’s money, so have to take less risk than Business Angels.
May place own people on board and require strict reporting

When exchanging equity in a business for funds a legal document must be agreed that specifies the terms of the investment. Venture Capital companies will have a range of agreements to use from Investor Rights Agreements, Stock Purchase Agreements and Term Sheets. It can be expensive and time consuming to raise money.

Agreements with Business Angels can be quicker and much less costly to organise, but never be tempted to cut costs so much that a well thought out signed agreement is neglected. There has been much woe and falling out of parties when issues occur that haven’t been previously considered and placed in a legal document.

Private equity funding can come in stages as the business grows:

• Seed funding
• First round
• Second round
• Later stage
• Mezzanine
See Types of Private Equity funding

Grants
There are only a few government or institutional grants available to businesses. These tend to be market sector and geography specific. Whilst serving a useful purpose for those able to claim them, they are so few that they are not applicable to most businesses and so not covered here.

For young businesses, the more you can do in proving your concept works and gaining what is called “traction” the more offers of help you will get and be in a better place to negotiate terms.

Small business marketing ideas

Marketing for small businesses Small businesses can have great products and services but struggle to get sufficient customers to allow them to expand.

Often this is because the owners of the business are too busy dealing with day to day activities to have time to plan or initiate the marketing activity. Yet it need not be an overly arduous task and can fit the finance and resources available.

Here’s how:

Firstly you need to establish some basics. You may think it’s obvious but just stop and jot these down on paper. Moving the information out of only being in your head on to paper (or to a PC), makes you have to think it through.
Who are your customers? Describe them; gender, age, interests, were do they live, what do they read, what qualities are they looking for in a product / service.
Are some types of customers more profitable, or even more enjoyable to work with than others?
Write down who the competition is and what makes them good or bad.
What is it about your offering that will excite your target customers and beat the competitors?
I’ve already written on how to market smarter by using market segmentation. By understanding the above you’ll now be ready to do so.
Look at your current branding, if any, and make sure it fits your identified customer. This is letterheads, logos, tag-lines (what you do in a nutshell) and the messages you want to convey.
Now get those messages to the right customers. Marketing is a creative process and by doing some brainstorming with colleagues or even friends you may be able to think of many ways of doing so, here are some:

Team up with other businesses / organisations by offering their customers special deals.
Have you got a good web site? Do you sell on-line? Even if yours is not a product that can be sold on-line, ensure your web site shows you at your best, is found for your important keywords and has good marketing messages plus contact details.
Write a blog, put helpful videos on YouTube, become known as an expert, speak at suitable events, all the time getting your brand out there.
Engage your current customers. Seek, reward and use feedback. Start a loyalty club. Ask to be recommended. Get existing customers to return.
Use advertising wisely. This is where knowing your customer pays off. Only advertise where your target customers are looking. The more niche you are the easier it is to be precise, but even if you have a broad offering, think about the market segmentation mentioned earlier.

It is important finally to put together a plan to do the marketing, with dates against actions. If you don’t then the pressures of running the business will always make it something to do tomorrow.

Good reasons for the use of Business Angel investment

One of the key bits of information that Business Angels or Investors into a venture will want to see is how the funds are going to be used.

I’ve seen every possible use given, from the perfectly sensible – “product development”, to the unlikely to succeed – “no one will lend to me any more and I need money to pay my rent, then I can get a business going”.

For some time I communicated with a chap who needed funds to train as a commercial pilot, he would then pay back the funds with significant interest out of his subsequent earnings. Sounded risky, relying on his ability to pass the exams and training, but he was a pleasant and determined guy, I hope it worked out for him.

So what ticks the box for Investors? Generally this can be anything that helps to grow the business:

Additional market research
Product development
Manufacturing facilities or equipment
Marketing of the product or service
Recruitment of staff
Working capital

Within this you do need to explain why you feel this will expand the business and some explanations are more attractive than others. Throwing money at marketing a new business that has never been operational is risky, but bringing to market an exciting new product or service from an already established business could be a winner. Taking on more staff to meet a high demand is good, whereas taking on staff to simply start an unproven idea is not so attractive.

Note that Investors are not interested in reducing debts or to pay yourself a high salary.

Surprisingly, many of the business plans and requests for funding that we see have excellent write ups of the opportunity, but completely miss out describing how the Investment will be used. Not only should that be very clear, but it should be part of the financial spreadsheets, showing when tranches of investment come in to balance the operational costs.

If it isn’t clear how the investment will be used in your proposal, but you have been fortunate in securing a meeting with an Investor, be prepared – they will ask!

Business Partner pitfalls and how to avoid!

Having a Business Partner can be a great benefit. They bring additional skills and resources, you also have someone to bounce ideas off and to share the stress & risk.

But in some cases the partnership can go wrong. Occasionally it is because there was not enough due-diligence in checking the background of the potential partner. Simple Companies House checks will reveal past company directorships and you can ask for references.

However most times where a business partnership ends it is because the partners no longer get along. This can result from incompatible personalities, differences in the direction that the business should be taking, or conflicting work styles. In many cases this can be avoided by:

At the beginning of a partnership you should establish that you share the same vision for the business.
Talk about how you and your partners wish to work on the business. Is the way of working compatible? Can you foresee any issues; for example one partner may be happy working late, whereas the other may prefer to finish at regular times. Resentment or guilt can build up from such differences.
Have clearly defined individual responsibilities. Ideally fitting complementary skills.
Ensure that the partners have common values and ethics.
Maintain respect for each other and trust that each is doing their best for the business.
Communicate. Lack of communication can generate misunderstanding, relationship difficulties and concern. Rarely is it possible to over-communicate.

Don’t let the pressures of running day to day operations prevent talking regularly to your partners, not just on immediate activity. Take time each month to review progress against targets and discuss how each is doing, checking if support is needed by one partner. Is the vision and direction still being maintained and shared?

Finally build trust with each other by doing what you say you will do. If you can’t for some reason, let your partner know ahead of the deadline.

What Type of Business Partnership Should I have?

Business Partners

Every enterprise that isn’t a sole trader will have people who are working together as partners to drive that business towards its goals.

This can be in a business that is registered as a legal partnership (see below), fellow directors of a company, or at its most simple just 2 people working together with no legal entity formed. Let’s look at the most common types of partnerships:

1. A General Partnership:

Where 2 or more people work together sharing responsibilities without a separate legal entity being formed. Profits and liabilities are shared. The least complicated, however it does mean each individual is personally liable for any debts that result from the business.

Although not a legally registered entity, HMRC must be told that you are working as a Partnership with someone and the income is included in your personal self-assessment.

2. Limited Partnership (LP):

At least one, or more, partners must take full responsibility and liability for the business and are known as a General Partner, similar to above. These must also be the only ones that take the management decisions.

Others can join as Limited Partners by putting capital into the business and their liability is limited to the amount they have put in. HMRC must be told and the partnership registered with Companies House. Each partner includes their portion of the profits within their own personal taxation.

This is a popular entity for Venture Capital companies, where there is a management team of General Partners, with other Limited Partners who invest funds into the portfolio.

3. Limited Liability Partnership (LLP):

For most partnership businesses this is a good choice, since it protects the individual partners against the business liabilities. You’ll need at least 2 “designated” members of the partnership who take on the HMRC and Companies House responsibility.

Other partners are termed “ordinary” members of the partnership. Again each is taxed on their income from the partnership as individuals.

Professional services such as solicitors sometimes prefer this legal entity for the flexibility it provides in bringing in new partners and altering profit sharing arrangements.

4. Directors of a Company:

Although not normally thought of as a ‘partnership’ in the legal sense, I include this because many companies will take on a new business partner and make them a director of the company. In this regard it is the most common “business partnership” and has the attraction of being well understood, protects personal liability and can give tax flexibility.

If starting a new business you have the opportunity to chose a format that works well for you. So it’s a good idea to check with your accountant on which legal entity is best for your personal circumstances.

Make your business scalable – the Investor holy grail

Investors look for business growth

Firstly let me say what I mean by scalable. That each new customer produces additional revenue for very little addition cost.

Think of software for example, once the costs of developing and producing the first copy are met, each additional sale of the software has minimal costs. Whereas a service orientated business such as consulting is limited by the number of consultants available and each one has a significant additional cost attached.

A scalable business can grow large and produce high profits, every Investors dream.

If you are starting from scratch and have a choice of the type of business to run, think about fixed cost Vs variable costs for that business. Fixed cost will be that which you need regardless of the number of orders you receive – office or factory rent, insurance and basic salaries for example.

The variable costs are those associated with each order, such as the cost of making that product or supplying the service. It can be materials that you have to buy in for each order, assembling or manufacturing the item, or the cost of hiring and paying the wages of an additional service person to fulfil the order.

There is of course going to be some additional (variable) costs associated even with a scalable business. You’ll need more marketing or sales staff if you are growing and other additional expenses, but it’s not the main cost of each new order.

Tips for a scalable business

Build it into your business model. Make being scalable an essential part of what you do and how you operate. Don’t undertake activity that can’t be scaled even if it seems like additional revenue, if you are not able to scale it, don’t do it.
Decide what your core expertise is and outsource the rest as much as possible, that way you are not restricted on growth. You can also form partnerships with others to allow faster growth.
Automate, automate, automate. Think through the whole sales/supply chain, cheap computing power now days can make business processes for each new order very little additional cost.
Being scalable by itself is not of use unless you can take advantage of it by getting lots of new business. You will need to market yourself as heavily as you can afford. This is where Investor funds can help (if you have a compelling business model and show you know the market). Use indirect marketing to give scalability to your marketing. PR, news items, Facebook/Twitter and brand recognition all have far reaching effects.
Use the web. The most obvious scalable companies are web based social media sites, but even if you are a product orientated business you can get very scalable using the internet. Amazon are a product company, but they outsource their products and sell and fulfil using the web.
If the business is not easily transferred to the web, perhaps because it is a very hands-on service, look at franchising or licensing your product or business model. There are all kinds of businesses successful this way from fast food to grass cutting companies. The example chart on this page is for a Mexican restaurant!

Not every business will want Investment, or to grow large and that is fine, but even those can benefit from looking at the way that scalable businesses make life easier for themselves by automating and using the scalability techniques now available.

What is due-diligence and how do I do it?

Due-diligence needs thinking about for Investors when they are about to embark on an investment. However it’s just as applicable for those who are seeking investment to check out a potential Investor. In both cases you should verify that the person, business and facts as stated are correct.

That’s not being mistrustful it’s just being business-like and expected by all parties to a potential funding agreement.

There are several types of due-diligence, not all will necessarily be relevant and this list is not exhaustive, but does illustrate the common areas to consider:

Legal

Are there IP (Intellectual Property) rights involved?
Any pending litigation or disputes?
Legal structure and ownership including share holdings and any restrictions
Regulation or licences that may be necessary for doing business

Financial

Verify financial information provided
Obtain bank accounts and statements
Examination of accounts and underlying performance of business
Details of any property owned by the business, including mortgages

Commercial

The market that the business operates within and its market share
Customers: list of major customers. Is the business dependant on just a few customers? Can you talk to some customers?
Suppliers: list of major suppliers. Is the business dependant on a few suppliers?
Competitors and the unique advantage that this business may have.
Assumptions that lie behind the business plan
Insurances held
Guarantees and terms & conditions of sale that the business gives

Human Resources

Management background check
Key personnel staying / losing
Pension commitments

IT / Systems

Hardware and important software used within the business
State of the systems, are they up-to-date, using appropriate technology
Compatibility to any existing systems if merging businesses

For Investors, where possible always use professional legal and accounting firms who will have a VERY detailed question check list for carrying out due-diligence. For smaller or even start-up businesses it may be that a simple management check and time taken to understand the market and the advantages of the business is enough. That is for you to decide, but you must make sure you do all necessary to verify people and facts.

Both Investors and Business Owners should be aware that due-diligence takes time and can be detrimental for the business when the owner is distracted from normal operating duties by needing to find all the due-diligence documentation required and in answering the questions raised, but it is an essential part of selling or getting investment.

What your business premises say about you

Original Harley Davidson Headquarters

Unless you are running a business that must have a high street store, many Start-ups begin in a bedroom or garage and as they grow expand into larger more business specific accommodation.

However can you really engage with customers if you are working from home?

It depends on the type of business, much can be done on-line, by telephone and if you need to meet up face to face, there are hotel lobbies. These can be extremely helpful to a young business and are used to business meetings taking place, with coffee and tea easily available.

Yet there is a feeling that being taken seriously requires “real” offices. Certainly there is a hierarchy of premises that come with a business’ success. When I worked for various large computer companies they grew from small beginnings to marble stair-cased headquarters:

How businesses grow

Is it absolutely needed to take on the expense of a rented office when you are just starting out, or are still relatively small? No, sometimes money can be used better to grow the business and some home businesses may never need a separate office.

But there’s the rub, you get categorised as a small, perhaps part-time business.

Taking the plunge as a young business in moving into dedicated office space can have significant advantages, instantly a foot-up on image perception, room for assistants/colleagues to work with you, a place to invite customers or business partners and an ability to concentrate on only work while there.

We all make value judgements every day and when thinking about joining, working with or buying from a business it is natural to look at the trappings of success that surround that business.

Ideally, get your own dedicated office space as soon as possible, but only you can judge when the time is right, or if it is appropriate to expand into more lavish surroundings.

Don’t make this mistake in your first conversation with a potential business partner or Investor

Investor listening You don’t know when you might bump into or be talking to a useful contact, business partner or even potential Investor. This first conversation is your best chance to impress and could determine whether you get a second more detailed conversation or meeting.

So grab the chance to explain your business, or idea, in a way that is clear and compelling.

Sounds easy, yet this is where otherwise excellent entrepreneurs make a big mistake. They are not prepared and simply ramble on in every direction. Think about it, can you tell me about your concept in a way that I will really understand and allow me to be excited about joining you as a business partner or Investor?

Some entrepreneurs are very good at this and you may be one of them, but the majority of people I talk to make a terrible hash of it. When they finish I am none the wiser and couldn’t honestly recommend them to the business partners and Investors I meet.

You’ve heard of the now clichéd Elevator Pitch where you describe your business in the time it takes to travel up in an elevator to a prospective customer/Investor. Well that concept came about because it was a useful way of visualising what was needed. So don’t be too quick in dismissing it as old hat.

Here are my top tips for engaging interest in your business when you first talk to a potential business partner or Investor. This is not an investment pitch or a presentation, but simply an opportunity for a quick conversation with a potential ally in growing your business.

1. Think about the situation and how much detail you need to go into. Is it a chance encounter with someone at an event, or a telephone call with a business angel where you have time to prepare?

2. Don’t start spouting words at machine gun pace, never giving pause for questions, or even noticing that you’re on entirely the wrong track of what was asked. Use your empathy and listen. Use the feedback you are getting, visually or by asking “is that what you meant”, “does that make sense” (if on the telephone).

3. Prepare an explanation of your business. Write it down and then practice saying it out loud. Writing the explanation down forces you to think about it and ensures it flows logically. After you have talked to someone about your business, reflect on how that went and make adjustments. You’d be surprised how many people don’t.

4. Have 2 versions – one that may take just 30 seconds which gives the whole concept in a nutshell and a second version that allows a bit more detail taking a few minutes.

5. This is what potential business partners and Investors want to hear:

Who you are, your experience and your knowledge relevant to making the business a success.
The market area that you are in and the size & potential of that market.
What your company/business/project/idea does. Clearly – so that there is no misunderstanding or confusion. This needs trying out on people who have never heard of your activity.
What problem does your business solve for clients/customers? What advantage does it give them? What desire or aspiration does it allow?
What is your uniqueness, how do you compare to your competition?

The listener should now have a initial understanding of you, your business potential and the market, if it is appropriate you should also add what you are looking for in order to grow that business. A Partner, a Mentor, an Investor, contacts, sales help or whichever you need.

Remember, experienced business people and especially Investors have heard it all before, don’t boast, don’t over-hype, be professional and have a couple statistics in mind to throw in that supports your claims – it will impress.

With good planning and thought you can make a favourable impression with whoever you meet – you never know where it may lead.

5 ways to be a success this year

1. Work on your brand and image.

Success breeds success and perception is reality. The reason these truisms exist is that they are, well…. true.

What do people think when you communicate with them? Do they want to be a part (either as a customer or an Investor) of your successful and dynamic business? Perhaps you’re not quite there yet, but do all you can to give that image to people.

Branding is often just thought of as logos and letter-heads, a catchy tag-line and corporate colours. It’s easy to get bogged down in working on these and miss a couple quicker paybacks of having your own company email address (it’s not professional for a business to be using gmail/Hotmail) and a simple but high quality business card (the cheap ones are not worth having).

Most businesses now have a website, they’re inexpensive to produce and can instantly be a way of conveying your brand and image, so think about having one well designed. A local web designer can do a far better job than the free sites that come with purchasing a domain name.

For established companies, rethink how you are perceived. Ask customers and importantly potential customers what they think of when your name is mentioned. What do they like, what would they change? Get a pair of fresh eyes to look at you.

2. Give better customer service than your competitors.

Customer Service is now being seen as the number one differentiator in this era of everyone having very competitive pricing.

Good customer service needs to be built into the image of your company; it is a positive brand characteristic and will pay back with repeat business and recommendations.

It also needs to be built into the fabric of your business, from the attitude of yourself and your staff, to the systems that you put in place to support it.

Think of how John Lewis continues to do well, while others fail. Amazon has a great customer service for an on-line company. They’ve made good service a part of who they are.

3. Get help from your peers.

There are people who have already overcome the same problems you have, or may have contacts that you need, or insights into what works and what doesn’t. They can brainstorm ideas and help with strategies.

Where do you find them and isn’t it worrying to give potential competitors information on your business?

This is where you have to choose the make-up of your group wisely; there will be entrepreneurs and businesses that are not competitors but have the same issues as yourself. You can also sign an agreement where you keep each other’s information confidential.

As to where; Mastermind groups (look it up on Google), Network events, local Chambers of Commerce, Small Business Federation, and even banks run such activities for clients. There are also commercially run groups, often catering for executive level participants which provide well organised meetings and coaching, although they do tend to charge quite high membership fees. You could also set up your own group. If you do so, lay out some agreed upon rules.

4. 90% of success is turning up.

Do it. Yes stop prevaricating and do it. Dreaming of starting a business? Thinking that you should look at your costs? Wondering if you should do more PR or marketing? Just do it.

“I have never met the person who went out to do what they really dreamed of, and then regretted it, regardless of whether they later succeeded or failed.
“But I have met many people in later life who wished they had taken more risks to follow their dreams” – Simon Woodruffe (Yo! Sushi)

General George S. Patton: “a good plan violently executed now will be better than a perfect plan next week.”

5. Employ the best people that you can find.

This has constantly been the most given advice when successful entrepreneurs have been asked about lessons learnt.

Now if you are the sole owner of a young business, struggling to cope and having to do everything yourself, you may think that any warm body would be a plus.

However, even then it’s worth getting the best that you can afford at the time, which means investing some time in your choice.

“When picking your team, work with people you like, and give them massive respect.” – Simon Woodruffe. But I would be careful taking on friends, they may not be the best choice for skills and what will happen if goes wrong.

There are of course many more things that you can do to make this the year when your business takes off, but it’s better to focus on a few actions and make them happen, than a lot of possibilities that never get done.

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