When you’re the founder of a start-up, you face so many choices. The process of taking a product or service from the idea and validation stage to actually running with it is likely to be the first true test of your entrepreneurship.
Many of the decisions in those early days relate to funding. Who you can find to fund your start-up and what that funding will cost you are decisions that you’ll likely have to live with for years. So there’s plenty of pressure to make the right calls.
The way that you stack your start-up funding is going to be one of those fundamental decisions that affects your business finances over the medium and even the long term. Let me say at this point that there’s no single right answer here – people stack their start-up funding in different ways, based around their individual needs and preferences. As such, let’s take a quick look at some of the options available to you.
Ways to stack your start-up funding
First, let’s talk about bonds. A bond is a loan that an investor gives to the company for a return on cash. An equitable bond, meanwhile, is a bond where the investor gets a return on cash, along with an opportunity for equity at an agreed later stage.
If you don’t like the idea of promising a return on cash, you could simply sell equity. The investor will then have a stake in your business. You won’t need to give a return on the cash invested.
It’s possible to combine these approaches for your start-up as well. Some people sell equity, for example, then subsequently choose to raise cash via a bond.
Bringing in a private equity firm can also be an effective way to raise the capital you require. Such firms have a (pretty well deserved) reputation for being ruthless. They may seek a large chunk of your business in return for the equity you need. Depending on the private equity firm in question, they might be able to provide you with the ability to scale fast, so it may be worth giving up a sizeable chunk of your business in order to pursue your commercial and growth goals more rapidly.
Another option is to float your company on the stock market to raise capital. As I said, it depends on your own particular needs – there’s plenty of business advice out there but, ultimately, it’s you who will be living with the consequences of these early financial decisions, so there’s an element of trusting your gut when it comes to stacking your start-up funding.
Giving away equity – but at what cost?
Many a founder has given away a sizeable chunk of their start-up in the early days, only to regret doing so years later. However, many successful founders have also given away equity and been able to scale rapidly as a result, without a moment’s regret.
I can’t advise you as to what’s right for your individual start-up, but I will say that it bears careful thought. Any equity you give away can cost you significantly later on down the line, so factor that into your financials. And if you really believe in yourself and that your start-up will make it, the bond for a return on cash route might work out best for you.
Regardless of how you stack your funding, you’ll need to do a cashflow forecast. I recommend doing a one, two and three-year forecast for a start-up. At a basic level, you’ll need to look at income (sales and loans) and outgoings (interest, insurances, staff wages, rent and so forth).
Be sure to have your cashflow forecast in place before asking to borrow money. That way, you can show your funder that you’re pre-planned your cashflow and use that as a basis for whatever targets the two of you agreed to set.
Meeting your financial targets
I feel it’s worth talking about those targets quickly. Stacking your start-up funding is likely to include agreeing set income-related goals. However, investors do understand that there is the potential for them to lose their money when they make an investment. As such, if you don’t hit your targets, be honest. Delivering bad news to an investor is vastly better than delivering no news!
Keeping your investor informed when the news is bad, as well as when things are going well, is an important way to show your integrity. And in the early days of a start-up, successful founders need to demonstrate the solidity of the integrity on which their company is built. Alongside funding, it’s another major factor that can influence the long-term nature of the company and the way that it develops.
Now you know your options, the choice of how you fund your business is up to you. Put some careful thought into it and play out the long-term impact of your decision in your head. After that, it’s time to go with your gut.