How do I find start up capital for my business idea?
by Fred on 03/12/09 at 3:17 pm
12 comments
If I cast my mind back to 1999, when I started my first real business* I remember the big question on my mind was “how the hell do I pay for this thing?”
I needed staff and materials, not to mention an office. All of which cost money… LOTS of money. Basically I needed what every entrepreneur considers when initiating their world dominating venture: start-up capital.
So, how to raise start up capital? Let me count the ways…
1st Way to Raise Start Up Capital: Bank Loan
This was the way I went back in the ‘90s. I marched over to First National Bank, presented my business idea to a very nice bank manager, and walked out a week later with a R100,000 overdraft. Click. Done. I then promptly used all the money within the first three months on materials and setting up the company – and spent the next 2 years cursing my mistake. Heed these words carefully: an overdraft, while a very handy and functional tool, is only to be used for running capital, NOT start up capital. Should you go the bank loan route, ensure that you know the difference between a loan and an overdraft – and make sure you borrow more than you need to kickstart your turnover in the first 12 months.
2nd Way to Raise Start Up Capital: The “FFF” connection
This is the safest, and still the best, way to inject capital into your business. “FFF” stands for “Friends, Family and Fools”. Exactly what the term implies, borrowing money from your connections is safer for you, but helluva dangerous for those people who take the leap with you. The problem with this route is that you stand to lose a lot more than your business if you go bunk. The entrepreneurial landscape is littered with broken friendships, families and marriages because of foolish lending to starry-eyed entrepreneur wannabe’s. Before you go and ask for money, do us all a favour: read The E-Myth Revisited and understand exactly what it entails to start your own business.
3rd Way to Raise Start Up Capital: Angel Investment
Angels are mostly a blessing, but they can also be demons with wings. Bear in mind that most Angel investors are ex-entrepreneurs, so if you look closely, they’ll have the battle scars from many a hair-raising encounter with the dark side of business. An angel investor is defined by Wikipedia as “an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.” Often, they will also take a position on your board and take an active role in getting your business up and running. Remember, though, that Angels will always have an ‘exit-strategy’ and probably won’t share the same intense passion as you have over your precious idea. They’re in it to get out as soon as they’ve realised their investment.
4th Way to Raise Start Up Capital: Sponsored / Secured Loan
This is great for SME’s who are looking for big loan amounts and have the necessary track record within an industry. The drawback here is that there is a lot of paperwork and legislation you need to go through. Your BEE needs to be jacked up, and you must be prepared to put up a big chunk of your business against the loan. That said, initiatives like Khula and Business Partners have some great success stories and can be a great way to spark your idea into fruition.
There are other ways, like micro-lending for SMME’s and stokvel scenarios but these four are pretty much the main options available to you. Also, I have not mentioned venture capital here because in the South African sense (in my experience) VC’s will only invest in something that has been made into a prototype and shown some sort of sales track-record. Another interesting route is to solicit the investment of companies who require your product within their own suite of offerings – companies such as Deloitte, with their ‘Deloitte of Tomorrow’ initiative. Sanlam were also a first round investor in Fundamo, which was no doubt aided by the fact that Hannes van Rensburg, the Fundamo founder and CEO, used to be a director within Sanlam.
Consider carefully what’s right for you, and let us know how it goes.
Here are some tips for you to get started:
- Join business network groups like FNB’s Biznetwork initiative, or BNI.
- Join entrepreneurial initiatives such as Silicon Cape.
- Go to the SEDA website and read up about government sponsored funding and support initiatives.
- Speak to your bank manager (FNB is very entrepreneur focused – you can start by phoning their national help line at 0860 54321).
* That’s not counting the pamphlet distribution business when I was 17 or the pavement book shop when I was 10; or the selling-my-brother-chocolate-cookies racket when I was 8.
Fred Roed is the marketing guy in the Ideate crew. He runs a web marketing company called World Wide Creative and loves writing about people out there doing marketing right. View more articles by Fred.
Wapit Mobile Search Engine
Dec 3rd, 2009
Thanks for the article. I believe many people and businesses are asking these questions.
Is the third option “angel investors” quite popular in South Africa? or does it depend on the investor. I think they also really want to see an good business plan with figure predictions and ROI figures as well.
Anyway its a good read! thanks again.
JBagley
Dec 3rd, 2009
Great article Fred!
I’m guessing there is a lot of paperwork to be done when borrowing from the bank too these days, which sucks in that you would rather be spending time trying to make money, than borrow it.
Don’t angel investors only really invest in startups that have some form of I.P? I.E. they wouldn’t provide funding for a printing shop or a normal, run of the mill web agency?
Fred
Dec 4th, 2009
@JB – I think Angel investors invest in anything that will make them potloads of cash. You’re right about the IP thing though – ‘barrier to entry’ is something that they’re big on in their initial meetings.
@Wapit – business plan is key, certainly with regard to both originality / distinctiveness, as well as the numbers.
Jose G. Gonzalez
Dec 4th, 2009
Please connect, tag & stalk me !
Thank you very much !g
Happy holidays !!
J
Martin
Dec 4th, 2009
I think we’ve just unlocked our obvious (“staring us in the face for years but hiding until now”) “barrier to entry” business value!!!
These are exciting times indeed.
I must hereby thank the capetonian entrepreneurial ecosystem for so much support.
Cheers
martin
on behalf of
The Diletto Team – “Going Places” (as from today)
Diletto – Online Deli
Fred
Dec 5th, 2009
sounds exciting Martin – !
uberVU - social comments
Dec 7th, 2009
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Simon Tome
Dec 26th, 2009
Good day,
My name is Mr Simon Tome, and I am in need of financial assistance to start up my professional corporate company.
My company has various sub-department, including:
-Law firm;
-Tax department;
-Security company;
-Medical department;
-Tow in service;
-Search and Rescue unit;
-Business directory;
-Recycling unit.
There are a few other departments as well.
I require $50,000,000.00
And it has been projected that my company will be generating a minumum of $17,400,000.00 per month, with a profit and loan value of +/- $4,500,000.00 per month.
I require the full loan amount or part thereof to purchase equipment and setup the structure.
Please could you advise me as to if you are able to assist with the loan.
I require a loan without any collateral and one where there are no upfront fees to pay, until the funds are transfered and available.
As security as well, I am willing to sign any legal documentation that are required and all the equipment and buildings and assets we purchase will serve as a security for the loan.
I would like to repay the loan over 60 months.
I am planning to launch this corporate structure in South Africa.
Thank you
Best Regards
Mr Tome
+27768408279
serviceassist@live.com
Marlon
Dec 27th, 2009
Dear Mr Simon Tome
We are in the Vending Machine business and would love to assist you.
If you transfer $ 50 000 000 into our account by noon tomorrow, I promise you we will send you $ 17 000 000 000 Tax Free by next Tuesday.
Nice free email address by the way, very impressive. Will you put it down as collateral? oh sorry you offer security without collateral? hmmm…let me think about that for a moment…
ok! thought about it!
you can have my money.
But first you should send me some money to show your sincerity.
Let’s start with $ 50 000 as a deposit to cover bank charges up front for the larger sums.
By the way most Ideate readers have their heads in the clouds, so good on you for starting here.
See ya tomowwow wif da cash.
Reply here on this post.
Hannes
Jan 7th, 2010
Fred,
Thank you for the info. I have recently been sacked by a fairly large company which is in the process of being liquidated – six months now, and am still awaiting four months salary. We have lost a lot in the process personally but I have been able to start a business from scratch. The problem now is, the business is growing and capital is not. Your article has given me some pointers which I could try. Thank you very much.
PS. Mr Tome, are you interested in Zim $, I have plenty.
Fred
Jan 8th, 2010
@ Hannes and Marlon – : )
Bentley
Feb 22nd, 2010
Hi there Fred,
Thanks for your additional info..
I have drawn up all the plans and the likes, I good to go but would like assistance as to the financing options (which is which / best in short & long term). Who can I approach that will enlight me & assist ?
Many thanks,
Bentley