Who will finance your ‘Great Idea’?

In my previous post, “Business Plan: The Core of Entrepreneurship” I wrote about how you should start making a business plan to sell any business idea that you have. And if you’re selling, somebody will have to buy it or in other words finance it.

Getting a new venture financed can prove to be quite a challenging task. However great your idea is, you have to be able to use your business plan effectively in order to convince that someone to buy your idea. I will subsequently write a post on perfecting your sales pitch etc. but for now lets just understand where your finance could potentially come from:

1.    Your Own Money:
This is the easiest and the toughest option. Easiest because it’s your own money, may be what you have saved over the years, it is your choice what you want to do with it and you can have instant access to it. Toughest because this might be your hard earned money that you have saved over the years. Would you be willing to take a (calculated) risk? How strongly do you believe in your idea? How good is your business plan?

2.    Informal Investors:
This is money from friends and family. Their expectations on returns on their money etc. are usually set informally or sometimes semi-formally. Personal trust would play a big part here.

3.    Business Angels:
These are individuals or a group of individuals, who offer up their own capital to new ventures. They differ from ordinary investors in a way that they like to get involved in the venture; besides the finance they offer their skills/insights/experience/expertise, which can prove to be invaluable to you and your new venture. In return they will demand a share in your company.

4.    Retail Banking:
They are banks that usually offer investment capital to new ventures and expanding small companies. They are cautious investors and would demand a personal commitment from you in terms of a collateral that is something pledged as a security for repayment of their investment. Minimizing their own risk will be priority for them.

5.    Corporate Banking:
They are interested in bigger investment opportunities and may settle for longer-range returns. They would loan the money in a way similar to the retail banks but some equity or share in the company might be offered. Again a collateral would be required.

6.    Venture Capital:
This is one of the critical sources of investment for fast-growing new ventures. Venture Capitalists (VC) usually seek big investment opportunities with potentials for a fast and high rate of return. They therefore take more risks than banks. They insist on a clear exit strategy that enables them to quickly liquidate and recover their investment. They are one of the most aggressive types of investors and can be challenging to handle.

7.    Public Floating:
This is a means of raising capital by offering shares in the venture to a pool of private investors. These shares can then be bought and sold in an open stock market. There are special stock markets for smaller business and for fast-growing ventures. The most important European small company stock market is AIM (Alternative Investments Market) based in London. Public floating is a popular option but a big no no these days due to weak global sentiments and already crashed stock markets.

There are a few more options available like the government, commercial partners and internal capital networks. The seven listed above are the key ones according to me.
When the time comes for you to choose from these options then the following questions will help you:

• What is my idea?
• How much money does is require?
• What stage of development is it in?
• What are the risks it presents?

Let me tell you something, there is no such thing as a perfect idea. DO NOT get married to your idea. What I mean by that is - be flexible. Feel free to discuss your idea with your friends and family or anyone who you think will help you to improvise on it and then fine-tune it accordingly.

There are good ideas and bad ones. Similarly, there are good business plans and bad ones. Sometimes bad ideas presented well go through to the end and good ideas fail to impress. Your aim should be to get the basics right and success shall be yours.

Tagged as: BUSINESS PLAN, entrepreneurship, startups, venture capital