Raising Finance for Entrepreneurs

Dear Reader

Have you got an invention you're proud of, or a great idea for a new product or service? This month we explore what's involved in raising the finance to bring a completely new idea to market.

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Best wishes,

Adrian Todd at CMC

07885 227 317

Adrian@cmc-partnership.com

How Do You Raise The Finance For Your Big Idea?

All ideas are bright ideas – if you believe in yours, there might be a market. But first, you need to invest. How much, do you think, to get these two products safely to market:

• A robust website able to transact with the public and handle high volumes of traffic (think LinkedIn or MySpace), capable of taking maybe tens of thousands of hits per day?
• An innovative baby buggy?

Most entrepreneurs who approach us optimistically estimate five figure sums, when the real cost is more likely to be in six to seven figures. Why? Because they haven't thought through every step, nor allowed for unforeseen setbacks.

The website will probably take around £1.2m to do properly: £0.6m for development, £0.4m for marketing and £0.2m for the business start up costs. To bring the buggy successfully to market could take £1.5m, covering patenting and other legal costs, stock funding, tooling, overseas manufacturing, transport, sales/marketing and website development.

And don't even think in terms of ‘starting small' and asking for more money if things take off! There's nothing that will upset your investors more. And usually enterprises started ‘on the cheap' aren't capable of being scaled up later – the website will fall over when traffic builds up, or to land a really big order for your product you'll need to provide samples, taking an extra production run, another container load of product, and longer time scales.

Don't let your enthusiasm blind you to the real costs – banks and lenders have seen it all before. They don't like lending amounts which they know won't do the whole job – they want to see your project go the distance and create a return for you and them.

Where Will the Money Come From?

Potential investors provide ‘matched funding', where what they put in is matched by what you put in. If you have no money, everybody will be happy to match that! So don't spend all your money developing your idea, run out, and then go asking for funds. Consider what you need right from the outset, and leverage what money you do have to build up the total ‘pot'.

As a rule of thumb you need to put in at least 10% of the total cost. First port of call is your bank – let's say they like the idea and your business plan, and they match your 10%. Now you have 20% of what you need.

Can You Borrow from Friends and Family?

Family, yes, friends, no. Anyone outside your family who lends you money must be a ‘sophisticated' investor, licensed by the FSA. See what your family can offer, if you want to, and add it to your 20%.

Now assemble a team of (‘sophisticated') investors, by putting up small amounts of money for each to match. Investors in new ideas such as yours never put all their money into one project; they spread their bets, putting small amounts into several businesses. You're aiming to end up with a team of maybe 10 to 15 investors, each with maybe 5% to 7% shares in your business, with you as the majority shareholder.

What Help Will You Need?

In our experience you'll need help in four areas:

1. You'll probably need to tap into someone else's experience to estimate the amount of money you will need in the first place, and to put you in touch with suitable investors. It takes tenacity and expertise to put together the finance for a start-up and then to keep an eye on things and keep the investors happy. At this stage many entrepreneurs wail, “But I'm an inventor / creative genius / entrepreneur, not a finance expert!” If you don't want to develop the expertise yourself, then bring someone on board who does have it.
2. To get investment you will need a solid suite of documentation including an Information Memorandum, business plan and set of management accounts. It'll help too if you have a professional and confident presentation to show to potential investors.
3. You'll need a carefully drawn up shareholders' agreement. Don't be tempted to do this yourself – get the best legal help you can. Ask us if you need introductions to good company lawyers.
4. And once you've got your money, you'll almost certainly benefit from help in deciding how to spend it wisely. Too many start-ups go crazy getting state of the art phone systems and fancy premises, and run out of cash before they've started generating a sensible return for their investors!

Got a great idea and want to give it a go? Give us a call on 01491 829 185 or email adrian@cmc-partnership.com. We'll happily talk you through the pitfalls and hold your hand through the process. Oh, and once you've taken on the UK, you'll want to take on the world. That's ‘second-round' funding – and we can help you there, too!