Business entities, funding and exit strategies

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In this overview we are going to discuss what are the funding options for the different type of businesses and enterprises: 1. Start up Funding1

According to a recent study, over 94% of new businesses fail during first year of operation. Lack of funding turns to be one of the common reasons. Money is the bloodline of any business. The long painstaking yet exciting journey from the idea to revenue generating business needs a fuel named capital. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I finance my startup? Now, when would you require funding depends largely on the nature and type of the business. But once you have realized the need for fund raising, below are some of the different sources of finance available. Here is a comprehensive guide that lists 10 funding options for startups that will help you raise capital for your business. Some of these funding options are for Indian business, however, similar alternatives are available in different countries.

1) Bootstrapping your startup business: Self-funding, also known as bootstrapping, is an effective way of startup financing, specially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success. You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to less formalities/compliances, plus less costs of raising. In most situations, family and friends are flexible with the interest rate. Self-funding or bootstrapping should be considered as a first funding option because of its advantages. When you have your own money, you are tied to business. On a later stage, investors consider

1 https://www.profitbooks.net/funding-options-to-raise-startup-capital-for-your-business/

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this as a good point. But this is suitable only if the initial requirement is small. Some businesses need money right from the day-1 and for such businesses, bootstrapping may not be a good option. Bootstrapping is also about stretching resources – both financial and otherwise – as far as they can.

2) Crowdfunding As A Funding Option: Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time. This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in. Why you should consider Crowdfunding as a funding option for your business: The best thing about crowd funding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a boon if you are not sue if there will be any demand for the product you are working on. This process can cut out professional investors and brokers by putting funding in the hands of common people. It also might attract venture-capital investment down the line if a company has a particularly successful campaign. Also keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is absolutely rock solid and can gain the attention of the average consumers through just a description and some images online, you may not find crowdfunding to work for you in the end.

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Some of the popular crowdfunding sites are Indiegogo, Wishberry, Ketto, Fundlined, Catapooolt, Kickstarter, RocketHub, Dreamfunded, Onevest and GoFundMe

3) Get Angel Investment In Your Startup: Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital. Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a upto 30% equity. They prefer to take more risks in investment for higher returns. Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser amounts than venture capitalists (covered in next point).

4) Get Venture Capital For Your Business: This is where you make the big bets. Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view. A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.

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However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you. They typically look for larger opportunities that are a little bit more stable, companies having a strong team of people and a good traction. You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option. Some of the well known Venture Capitalists are – Nexus Venture Partners, Helion Ventures, Kalaari Capital, Accel Partners, Blume Ventures, Canaan, Sequoia Capital and Bessemer Ventures.

5) Get Funding From Business Incubators & Accelerators: Early stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of startup businesses every year. Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to to a child, who nurture the business providing shelter tools and training and network to a business. Accelerators so more or less the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap. These programs normally run for 4-8 months and require time commitment from the business owners. You will also be able to make good connections with mentors, investors and other fellow startups using this platform. In US, companies like Dropbox and Airbnb started with an accelerator – Y Combinator.

6) Raise Funds By Winning Contests:

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An increase in the number of contests has tremendously helped to maximize the opportunities for fund raising. It encourages entrepreneurs with business ideas to set up their own businesses. In such competitions, you either have to build a product or prepare a business plan. Winning these competitions can also get you some media coverage. We, at ProfitBooks benefitted a lot when we were regional finalists in Microsoft BizSparks in 2013 and won Hot100 Startup Award in 2014. You need to make your project stand out in order to improve your success in these contests. You can either present your idea in person or pitch it through a business plan. It should be comprehensive enough to convince anyone that your idea is worth investing in. Some of the popular startups contests in India are NASSCOM’s 10000 startups, Microsoft BizSparks, Conquest, NextBigIdea Contest, and Lets Ignite. Check out the latest startup programs & contests in your area.

7) Raise Money Through Bank Loans: Normally, banks is the first place that entrepreneurs go when thinking about funding. The bank provides two kinds of financing for businesses. One is working capital loan, and other is funding. Working Capital loan is the loan required to run one complete cycle of revenue generating operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned. Almost every bank offers SME finance through various programs.

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In US, sites like Kabbage can help you get working capital loan online in minutes. Unlike traditional lenders, Kabbage approve small business loans by looking at real-life data, not just a credit score.

8) Get Business Loans From Microfinance Providers or NBFCs

What do you do when you can’t qualify for a bank loan? There is still an option. Microfinance is basically access of financial services to those who would not have access to conventional banking services. It is increasingly becoming popular for those whose requirements are limited and credit ratings not favoured by bank. Similarly, NBFCs are Non Banking Financial Corporations are corporations that provide Banking services without meeting legal requirement/definition of a bank. Check MicroFinance Institute Network for more details. Here is a list of top MicroFinance companies in India.

9) Govt Programs That Offer Startup Capital: In US, there is a small business lending fund and a dedicated portal for Government grants available for local businesses. If you comply with the eligibility criteria, Government grants as a funding option could be one of the best. You just need to make yourself aware of the various Government initiatives.

10) Quick Ways To Raise Money For Your Business There are few more ways to raise funds for your business. However, these might not work for everyone. Still, check them out if you need quick funds. Product Pre-sale: Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. Remember how Apple & Samsung start pre-orders of their products well ahead of the official

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launch? Its a great way to improve cashflow and prepare yourself for the consumer demand. Selling Assets: This might sound like a tough step to take but it can help you meet your short term fund requirements. Once you overcome the crisis situation, you can again buy back the assets. Credit Cards: Business credit cards are among the most readily available ways to finance a startup and can be a quick way to get instant money. If you are a new business and don’t have a tons of expenses, you can use a credit card and keep paying the minimum payment. However, keep in mind that the interest rates and costs on the cards can build very quickly, and carrying that debt can be detrimental to a business owner’s credit. Also read about Invoice Discounting. Its a good way to manage your cash flow in short term. Conclusion & Next Steps: If you want to grow really fast, you probably need outside sources of capital. If you bootstrap and remain without external funding for too long, you may be unable to take advantage of market opportunities. 2. Funding Options for SMEs in the UK2 Great business ideas are essential to getting your SME off the ground. However, what can keep your company from doing so is the lack of funding and sustainable business finance. How you determine the correct method of finance is critical to the longevity of your brand. Similarly, you must consider your chances of success in obtaining the funding. This article will outline a range of finance options for SMEs in the UK, and the crucial advantages and disadvantages of doing so Whether you are a startup or SME, you will require finance at some point. However, there are several factors to consider about the range of SME funding options:

• How much funding is required?

2 https://www.businessrescueexpert.co.uk/guide-to-funding-options-for-smes-in-the-uk/

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• Current revenue or forecast for a new business • Are you happy to use personal assets as security? • Do you have ownership of the business property? • Are you willing to sell shares?

With that in mind, we’ll discuss the SME finance options below. It’s also important to note that, while traditional banks are still the predominant source of finance, smaller businesses are using a range of alternative methods to gain funding. According to the Small Business Finance Markets 2017/18, peer-to-peer lending increased by a staggering 51%, among others. Government grants Government business funding is available for SMEs. However, obtaining a government grant is a competitive process. Typically, the government grants focus on particular business themes or purposes:

• Innovation • Technology • Energy • Training

There are also regional grants that support growth and provide small business funding. For instance, your location may improve your eligibility for government business funding. While it can be challenging obtaining the finance, you do not have to pay the money back. If the above business purposes do not relate to your company, the government also offers support through tax schemes and capital allowances, reducing tax liabilities. Venture capital funding Venture capital is a form of investment at an early-stage for a business, with great growth potential. Unlike private equity – generally investing in a more mature company – venture capital funding involves investing in a new business, with many not yet making a profit. Aside from the SME funding, obtaining venture

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capital can also provide valuable expertise and guidance within the specific industry. Similarly, you will have additional resources and connections. However, you must consider that you may lose some control in your business, as the investors will likely want to become involved in the company objectives. Likewise, depending on their stake, you could lose management control. Working capital loan Working capital is crucial for all businesses – small or large. Without working capital, you cannot purchase stock, pay staff wages or undertake any other essential activities. When it comes to SME finance, working capital loans can meet everyday costs. The specialised loan, unlike larger business loans, is short-term and intended to cover a cash flow issue, or growth. Similar to the above options, there are advantages and disadvantages to a working capital loan. You will have the cash available to deal with any cash flow issues, and can spend it on the assets you would like. You will also keep ownership of the company. However, you will have to repay the loan and, generally, within a much shorter time period to that of a business loan. There is also the chance of a high level of interest, so you must consider all factors. Invoice finance If your SME is struggling to obtain a business loan, invoice finance may be a suitable alternative. This procedure can be a relatively quick way of accessing funds, using your invoices as assets. There are two types of invoice financing: invoice factoring and invoice discounting. There are differences between both, regarding sales and who is responsible for collecting payment. With invoice discounting, you retain control. On the other hand, invoice factoring involves a factoring company collecting payments. After you raise a customer’s invoice, the finance company will afford your company between 75-90% of the invoice value. While invoice financing does free up time in chasing late payments, you will lose profits on any invoices managed this way.

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Asset finance Asset finance is an SME funding option, referring to a type of finance used by companies to buy necessary equipment and stock etc. In the case of startup businesses, cash is often tight and asset finance allows you to gain the tools for growth, without paying large, upfront costs. You can spread the cost of the asset over a longer period, regularly paying a charge. However, you cannot claim capital allowances on leased or hired asset if the lease period is less than five years. You may even end up paying more for the asset over a longer period. Crowdfunding Today, there are multiple websites helping to raise SME funding for relatively low cost businesses. Crowdfunding has experienced a boom, due to the likes of Kickstarter, and is an SME finance option. Crowdfunding enables you to set a target fund, over a period of time. However, it could prove difficult to obtain the small business funding without a unique idea, persuasive pitch and long-term plans for growth. Peer-to-peer lending As mentioned above, peer-to-peer lending has experienced a growth of 51% in the past year. Similar to crowdfunding, peer-to- peer lending connects your business with corporates and individuals that want to lend. As the bank has been cut out of the equation, borrowers often receive lower interest rates. However, those individuals or companies are investing in your SME, thus may become heavily involved in the future. As you can see and compare, many of the financing options for Start-up and SME’s are similar. Of course, the more advanced your business is (vintage stage) the more options your enterprise has to access finance. I would like to spend a few words on another way of finance which was also mentioned in one of the videos that you watched in Topic 2 e.g. Impact Investing. This was mentioned in the context of the

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Benefit Corporation or B-Corp and is worth mentioning because it is a novel way of funding enterprises whereby the profitability is not the primary driver but the mission, vision and values of the company are more prominently around social and environmental impact alongside economic returns. 3. Impact Investing3 Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

Why impact investing? Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations, and that market investments should focus exclusively on achieving financial returns. The impact investing market offers diverse and viable opportunities for investors to advance social and environmental solutions through investments that also produce financial returns. Many types of investors are entering the growing impact investing market. Here are a few common investor motivations:

• Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to both individuals and institutions with an interest in general or specific social and/or environmental causes.

3 https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing

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• Institutional and family foundations can leverage significantly greater assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.

• Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals.

Who is making impact investments? Impact investment has attracted a wide variety of investors, both individual and institutional.

• Fund Managers • Development finance institutions • Diversified financial institutions/banks • Private foundations • Pension funds and insurance companies • Family Offices • Individual investors • NGOs • Religious institutions

Characteristics of impact investing

• INTENTIONALITY An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing.

• INVESTMENT WITH RETURN EXPECTATIONS Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.

• RANGE OF RETURN EXPECTATIONS AND ASSET CLASSES Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

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• IMPACT MEASUREMENT A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field.

• Investors’ approaches to impact measurement will vary based on their objectives and capacities, and the choice of what to measure usually reflects investor goals and, consequently, investor intention. In general, components of impact measurement best practices for impact investing include:

• Establishing and stating social and environmental objectives to relevant stakeholders

• Setting performance metrics/targets related to these objectives using standardized metrics wherever possible

• Monitoring and managing the performance of investees against these targets

• Reporting on social and environmental performance to relevant stakeholders

As you can see, there are several different funding options available for an enterprise and you must find the best way to raise finance what is best for your venture and serves the purpose of the organization.