Young companies are more likely than not to fold within the first 36 months. Advisors have a crucial role in making sure they start well and stay viable in the long term
According to research, 20 percent of new businesses fail within the first year and 60 percent go bust within their first three years. As an advisor, what can you do to make sure your client bucks the trend?
Getting the right advice is clearly crucial; so too is funding, to ensure that whatever plans a business founder has for reaching paying customers, they have the means to go out and attract business.
In the early stages of a business, there are several routes that exist to get a company up and running.
Bootstrapping / friends and family
Bootstrapping a business means that the money for it comes out of the personal pocket of the founder.
This can mean savings or redundancy funds are used to get started at the kitchen table, and clearly this is the way to begin with the lowest barrier to entry.
Bootstrap entrepreneurs like to know they are sole owners in control of the business. With this comes the reality that they must be prepared for a slow growth trajectory, work from home and do all their own admin from marketing to expenses and accounting.
The next stage up from this is the family and friends route: leaning on a network of personal contacts to lend moral support and advice. Typical amounts raised from this type of funding are between £10,000 and £150,000.
It’s crucial that personal arrangements are formalised and properly documented, with honesty from the founder about business model, revenue expected and risks involved.
‘Friends and family’ is a term that masks what can be a serious investment from some, so it is important to be open. It is also essential to limit the amount of equity given away, as heavily diluted ownership will make it more difficult to raise money via VCs or angels in later rounds.
Unless your founder is lucky enough to know someone experienced in starting up a successful business, this kind of funding may not be enough to see the business succeed: remember, advice can be sector-specific, change over time and, if it comes from someone you know, may not be delivered in a way that can be actioned.
Friends and family can provide support – both financial and emotional – but they may not be the best source of relevant information for the founder’s business.
Fortunately, there are options which combine financial help and professional mentoring.
One of the best ways to ensure a business gets off to a good start is to use a startup loan.
These are loans of up to £25,000 per director of a new company (less than three years old). Proceed at a competitive six percent p/a, startup loans often come with mentoring which can be extremely valuable in itself.
Laura Taylor, Strategic Partnerships and Startup Champion at Swoop, says that founders need to overcome the idea that a business in debt is a business in trouble. The reality, she says, is that businesses need to invest in their own success:
“Understandably, people do not like the idea of committing to the repayment of thousands of pounds of debt, especially in the early stages of a new enterprise. But mentoring can identify the gaps in the founder’s knowledge and advice on things such as hiring to fill skill gaps, marketing and other areas which may be outside the founders area of expertise. Most new businesses startup because the founder has a vision: they find a way of doing something better or making a product that people need. Founders tend not to start a business because they have a yearning to do more back office work.“
Find out more about startup loans here.
Investment may be an alternative to, or next step from a startup loan; though getting a fledgling business ready for investment may take some funding to position it correctly.
Investors, who put in money in exchange for a proportional amount of equity, can be found for pre-revenue businesses, but it does require a lot of careful research to pitch to the right people – and to make sure you get the pricing right.
Valuation of a new business is something that you can help with as an advisor: it’s a figure that will be at the centre of negotiations between both the founder and the investor.
For an investor, a lower valuation is more cost-effective; they can own more equity for a lower buy-in; the founder will want to be able to sell less equity at a higher value. Finding the sweet spot is essential as an inflated valuation of a startup can cause long-term damage.
While a higher valuation means more seed capital without giving away more equity, the pressure is on to deliver on expectations. If a founder does not deliver on those expectations, it may become necessary to drop the valuation at the next round – which gives a terrible impression to prospective investors and dilutes current investors more than they had expected.
Find out more about pre-revenue funding here.
Getting a business to succeed is not easy or guaranteed but with the right help, a founder can improve their chances of success.
Advisors have a role to play in giving impartial advice, providing a reality check over numbers and using their experience to guide an inexperienced founder through the right channels.
To learn more about the journey from the kitchen table to long term success, check out this blog by Neil Dillon, Head of Equity at Swoop.