How to commercialise your business idea? (part 6)

December 29, 2015

Getting funding

As noted in earlier posts on this blog, the 2 main sources of investment are business angels and venture capital (VC). Angel investors are the single largest source of funds available to start up enterprises (Sudek, 2007; Szerb, Rappai, Makra, Terjesen, 2007). Further many ‘venture capital-funded companies were at least three years old when they received their first round of funding’ (Schramm, 2004, 112). Thus, first get ‘seed’ or ‘angel’ funding and then build on to VC funding. Now it should be remembered that many ‘service’ type businesses can be built up through personal funds, natural growth and financial instruments like term loans, overdrafts and short-term funding but innovation companies tend to be faster growing and in need of higher levels of capital.

Sudek (2007) in his empirical findings noted that there were 4 themes that angel investors focused on:
• the passion of the lead entrepreneur
• the trustworthiness of the lead entrepreneur
• the quality of the management team; and
• the existence of an exit strategy or liquidity potential for the investor’ (p95).

He further noted that investors ‘liked teams that struggled through hard times and kept pursuing the venture’ (p96). Regarding exit, as IPOs are rare, ‘angels are very interested in learning who are the potential acquirers may be for a particular venture’ (p96). This brings us back to a point made in the previous post regarding the importance of building a management team. Investors tend to want to back a team of people rather than an individual. This makes sense as no one person can have all the necessary skills to build a fast-growing business and a team of people allows for the organisation to expand more quickly than a single individual which inevitably becomes a constraint on growth.

The other point that entrepreneurs need to understand is having an ‘exit’ strategy for the investors, especially angels and VC. Too often, entrepreneurs make great pitches on the idea and possibly the market. Usually, they are light on the financial figures (which is inexcusable of making a pitch to investors) but they rarely, if ever, demonstrate a path for the investors to get their money back and make a profit on exit. If investors cannot see a way to get their money back and make a profit then they will never invest. So now you know to focus on building a team, showing how you built the idea, show how you built the team and the organisation and how they can ‘exit’ with profit.

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