Financing your startup!
So you have a great idea, now all you need to get going is some lovely money. The main sources of finance for startups are:
1) Friends & Family
2) Government support agencies
3) Angel Investors
1) Freinds & Family
Tapping friends and family for investment may seem tempting as quite frankly it is easy, people who know and trust you may be willing to back you to help you get started. However be very aware that you will now be compromised (whether you like to admit it or not) to this investor. If the business fails you will be in a very embarassing situation until the money has been repaid. Try not to mix business and pleasure for everyone’s sake. If you cannot resist the temptation to take the cash on offer (which is perfectly understandable) then please be very careful to frame the exact terms of repayment out from the start and also what the investor will receive in return for the investment. It is very easy to be casual at the start of a business relationship, time and time again when money is involved things turn sour. What if the relation becomes hard pressed (probably from throwing money around on startup companies!) suddenly they want their money back!. What wait a minute I presumed I would repay you at a later date shock horror. Consider an alternative scenario and your business starts taking off, suddenly the investor is eager to get more involved with his 50% stake, what? who said anything about 50%?, I thought we said we would see how things went!
Copperfasten everything in a written framework and hit the roof at the first suggestion of deviating from the agreement. Better still get them paid off ASAP and hold on to as much equity as possible (Make sure you never do a 50% 50% deal, these just don’t work and lead to a legal quagmire)
2) Government support agencies
People automatically presume that they are entitled to all sorts of grants and funding, God dammit I am creating employment am I not? I am helping the economy to recover! I am opening a coffee shop!. This is not how it works do not expect any civil servant to get excited about the fact that you are opening a run of the mill business. The amount of applications they get for the resources available are astounding. Unless your business has the potential to create significant employment (i.e. Manufacturing) or has export potential, the main support offered will be discounted training courses, some small employment grants (5K), web development grants (2k) that sort of thing.
Look at it from the other side of the table, application 1 = a website for stag & hen trips in Kilkenny or 2 a private label cream liqueur plant in Cavan. Now which is of more interest?
Local county enterprise boards offer basic support and the training courses are generally worthwhile and often great value (I am just about to start a Accountancy for small businesses course which cost €100)
Enterprise Ireland are the big guns and they have ‘Business bouncers’ at the door rejecting 100′s of business each year. A good route into the system is the hothouse scheme (www.hothouse.ie). Enterprise Ireland are really interested in high potential startups mainly in technology, pharmaceuticals etc. They have huge investment funds at their disposal and are prepared to invest in the right businesses.
3) Angel Investors
Angel investors were very popular in the dot com era. Basically successful individuals who probably founded and sold their own business and now have both time and money to get involved in startup companies. Try www.businessangels.ie for further info, according to their site they were involved in completing 36 deals totalling 6 million of angel investment in 2009 – not bad. The angel networks try to match suitable angels with the right business, so if your business is in retail they will try to find you a Theo Paphitis type etc. Again I would not be approaching these guys with a plan to run a local babysitting service.
4) Ahhh the Banks
Where do I start? Firstly, despite the fact that you opened your first bank account in AIB at UCD and got a free USIT card to boot does not mean that your bank will lend you any money. The banks spend a small fortune promoting their support for small businesses and new business packages, they do want to have new business accounts for the simple reason that they are very lucrative, between cash lodgement fees, cheque book fees, overdraft fees etc you would be very surprised at how much your bank charges will be every year (this is often totally underestimated on business plans where people put down €1000 bank charges, a shrewd bank manager will have more respect for a biz plan with realistic charges).
In Ireland we tend to forget that banks are businesses, for the same reason our families vote for Fianna Fail / Fianna Gael etc for generations despite their varying levels of ineptitude, we tend to see ourselves as being owed something by our banks for years of custom.
Banks in general only want to lend money to people who do not really need it, at present they will expect you to be putting up about 50% of the money required. If you are not prepared to risk your own money then why should they?. You need to be very confident and well prepared and don’t be afraid to play one off against the other “ulster bank have offered me €30,000 at 3.0% can you match this? has a better chance of succeeding versus please sir can I have some more?