Start-ups and small business funding

Sources of Funding

by Ilya Nikitin 

Knowing the difference between high growth technology start-ups and small businesses is critical when it comes to funding decisions. High growth technology start-ups are very different from other businesses. With a traditional small business the chances of succeeding in the first two years are high with an estimated 75% success rate. In contrast, a high growth technology start-up even with a great idea, a solid business plan backed with a strong team and investor has a 75% chance of failing (Compass.co, 2015).

The difference being – you will never find a local tea shop make the fortune 500 ranking but this is the potential of a high growth technology start-up. In the words of serial-entrepreneur and academician, Steve Blanc “start-ups rarely succeed, but when they do, they can succeed brilliantly”. The implications for funding are simple. To fund the local tea shop you make a case to your bank manager for loan approval. The bank can review the case using decision making tools based on thousands of ‘local tea shops’ or similar businesses and make a decision. A high growth tech start-up is an unacceptable risk to the local bank manager as he/she cannot compare to the thousands of similar cases. This is where business angels and venture capitalists come to the fore.

Not all technology businesses starting out fit this risky profile. Some technology businesses starting out can be in a mature market and fit within a traditional financing pool due to the low risk and therefore qualify for financing through bank loans. Similarly, not all start-ups are technology based, some are disruptive business innovations which carry the same risk and uncertainty and like the high growth tech start-ups will source funding through business angels and venture capital firms.

Whether you are a starting out in a small traditional business or a high potential technology start-up raising finance takes careful planning. The factors that influence funding decisions remain the same (Riley, 2015):

How much finance do I need?

Will I need security and if so what can I provide?

When do I need the finance and for how long?

Am I willing to relinquish some control of my business in return for investment?

To answer the above question you need to consider set up costs, starting investment in capacity (fixed capital), working capital and growth and development (Riley, 2015).

There are multiple options of funding available regardless of the type of business you are in starting out. As an entrepreneur you may have a great idea and business plan to succeed but you need to be very clear about the business’ funding needs at each stage. Control of the business maybe a driver of this decision.  Regardless of your winning idea and plan if you cannot raise the finance you may never move beyond ideation stage. Making the wrong funding choices can mean the difference between success and failure.

References

Compass.co, 2015. The Global Startup Ecosystem Ranking 2015. [Online]
Available at: http://startup-ecosystem.compass.co/ser2015/
[Accessed 14 November 2015].

Riley, J., 2015. Sources of Finance for a Startup or Small Business. [Online]
Available at: http://www.tutor2u.net/business/reference/sources-of-finance-for-a-startup-or-small-business
[Accessed 07 December 2015].

 

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