The Funding Gap
There are several ways an entrepreneur can fund a start up venture
- Self: from his own savings. Obviously, If he has enough money, and can risk it, this definitely has advantages. He won’t lose any control or to share the company, He won’t have to find investors or convince them.
- Friends and family: If the entrepreneur doesn’t have enough money, perhaps his family, friends or acquaintances do. Often this is a big motivator. If the venture fails, and the money is lost, will the entrepreneur be able to be to face his friends in the pub or golf club? Will his family ever forgive him? They may be cross and not talk to him for years.
- Angels: These are high-net-worth individuals or sophisticated investors. They should know what they are doing. The trick is to find them and convince them to invest in a given venture.
- Crowd funding: Let’s talk about “equity” crowd funding, rather than Donation, or Reward crowdfunding. Crowdfunding investors tend to invest less than angels, so you need more of them. Typically crowd funders don’t invest unless there is some momentum. They do not like to invest unless there is some investment in place, even if the idea and the deal is great. It has been suggested that a crowdfunding is likely to be successful if at least 40% of the money required has already been raised.
- Venture Capital or Private Equity: These are professionally managed funds. They are unlikely to fund start-up ventures because they are too small and too risky. Rather they may add funding to a venture as it grows. Theoretically they can buy out early investors giving them an opportunity to exit, but will probably leave the existing funds I’m place.
- IPO (Initial Public Offering): Once a venture has reached a level of maturity, it can “go public”. Shares are now bought and sold on a stock exchange, and early investors will have the opportunity to exit.
This is all fine, as long as the entrepreneurs or his friends and family invest enough money, or sufficient angel funding is available. If this is not the case, the enterprise is in limbo and the project cannot go ahead.
What is now needed is ahead investor, to “prime the pump” so either other angels or or crowd will follow.