Alternative Finance : The Other Options…
In our previous article we shared our point of view on why we feel more entrepreneurs will reject VC funding in 2017 and consider alternative finance click here to read.
In this article we will finish off our point on how to pick the right venture capitalist by looking at things less from the entrepreneurs perspective and rather the viewpoint of the early stage investor. Then we’ll explore some of the other finance options small business owners have to consider.
Following on from our last post, it is so important to understand the incentive structure of a VC. They are looking for investments that will return 10X returns for their capital invested over a short time-frame (2 -4 years). There are primarily three ways they achieve their exit strategy:
- Sell shares in later funding rounds
- Your company IPO’s (shares become available to the public on a stock exchange)
- Mergers & Acquisitions from a larger company who buys the investors shares
In summary, the investor sells their shares at a higher price than they acquired them for at an early stage. Therefore if your short term goal is aligned with the incentive structure of your VC investor then this is the right option for you. Also, be accepting of the fact that typically one in 10 investments succeed for a VC, so the odds are heavily against you, which is why some consider them as vultures (bit narrow-minded in my opinion). As an entrepreneur you have to be comfortable with taking the risk once you are aware of the nature of the investor. You should also be critical in evaluating what stage of growth you are in and what type of support you need e.g. validating an idea vs. hiring a great team and scaling internationally.However, if you want to build a sustainable business and generate long-term wealth while controlling the pace of growth then read on and consider the other options below.
The experience from The Guardian article titled ‘Vultures dressed up’: the entrepreneurs rejecting venture capital funding explains how an entrepreneur could not grow the firm at the rate expected by the VC investor and therefore had to shut the business down abruptly. I don’t believe this experience is a good barometer to go by for all entrepreneurs as there was a lack of due diligence carried out by the entrepreneur on this occasion. However, I do believe in 2017 entrepreneurs will explore alternative finance methods more often.
The debt and equity financing landscape has increased in options in the last five years and entrepreneurs are becoming increasingly aware of their wide array of options. Below are just a few examples:
Financing without equity or debt
Family and Friends: Turning to family and friends during the early stages should be the first option for raising finance after bootstrapping with your savings.
Crowdfunding: This is a type of funding typically carried out online through sites such as Kickstarter and Indegogo, provide the opportunity to raise money in exchange for rewards.
Government Loans: Such as government-backed loans from the British Business Bank or Startup Loans who offer up to £25,000 in loans to small business owners with low-interest rates.
Alternative Lenders: Companies such as AH Partners provide loans of anything up o £20,000 to business owners who typically get rejected from banks.
P2P Business Loans: Platforms such as Funding Circle, Rebuilding Society and RateSetter facilitate loans to small business owners from individual and institutional capital provided by investors.
Equity Crowdfunding: Works similar to crowdfunding but as the name gives away, the value exchange is between raising money from individuals who invest online in exchange for an equity stake in your business and annual dividends. Leading sites for equity crowdfunding in the UK include Seedrs and Crowdcube.
Angel and VC investors: Angel investors are high net worth individuals who invest in early-stage companies. VC’s are funds raised and managed by General Partners on behalf of Limited Partners (like insurance institutions and angel investors who contribute capital) to invest in early stage companies.
Both equity and debt have there pro’s and cons but making an informed decision on which one to pursue when growing your business, starts with understanding the array of options you have and what they mean. As you can imagine, the expertise an Angel Investor can provide you is different to the expertise your uncle Tony, who’s offered to give you £15,000 can provide you. Where you are in your business lifecycle matters when raising finance, we’ll touch on this and more about the different options in our next post.
I hope this article has served as a stimulus to help small business owners consider their options for financing in 2017.
If you need any further advice get in contact with AH Partners directly on firstname.lastname@example.org or visit www.ah-partners.com to join our mailing list.
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