22/09/10

By Christian Nellemann, Founding director, XLN.

I used my own savings to kick start the cost of setting up my first business, and, as it progressed I was able to enlist the help of family and friends. I learned quickly that the shares issued as a result of this assistance needed to reflect the overall involvement in the success of the business, rather than the original contribution made.

Next steps...

For new businesses, help from friends, family and even committed suppliers, is the most reliable (and safe) way to get up and running. Avoiding higher repayments and interest from bank loans is a must at this stage of the game! However, it is crucial to ensure that all parties who have invested are clear about how their money will be used (and that these objectives are met) as well as when and how it will be repaid.

Show yourself in the best possible light!

Before approaching investors, consider your situation. Are you able to clearly and eloquently demonstrate a need for the business you are proposing or have in place? With this goes a comprehensive knowledge of the industry you are either working within or in direct competition with — there may well be a need, but how will your business deliver what others don’t? Be wary of stretching the truth: above all, investors value honesty in their business partners — it may be that you have a great raw idea that can be moulded to and developed by the involvement of investors — starting off on the wrong foot by being dishonest severely jeopardises the chance of this coming to fruition.

It is crucial to plan your pitch, preparing for the best and worst case scenarios, so that you appear well organised and able to manage the risk of negative feedback. Research your potential investors thoroughly and remember they don’t want to try and catch you out, but rather get the opportunity to invest in an exciting new business venture.

Steady as she goes...

Amongst the errors made by many start ups is giving too much equity away to the first sources that offer investment. This can result in these investors being unnecessarily pressured when future monetary needs arise. Borrowing is fine (within reason) but beware of releasing too much ownership as this can leave you with little with which to attract future investors when the need inevitably arises.

How much is enough?

During the early stages of business development, it is easy to lose sight of the need for enough capital, in favour of an idea taking off. Remember to ask for enough! Clearly the prospect of securing an investment can cloud negotiations, but it’s important to have a robust idea of how much is (realistically) needed to get the business going — it will be much harder to go back and ask for more later, as this would involve altering the original boundaries and agreements, something which makes investors nervous in the current climate.

Investor dynamics...

Think less about the number of investors that you wish to bring on board, and more about the individual contribution and level of control they leverage — if you don’t want their personal involvement, don’t borrow their money. Keep operations as streamlined as possible by working alongside no more than three to four investors, and ensure the way decisions will be reached is set in stone before any money changes hands.

Remember they have invested in you, so don’t feel you have to hush up bad news in order to retain their involvement. However, use your discretion here — investors don’t need to be consulted over every day to day operational decision, they are behind you, as well as the business, so expect a strong and forthright commitment to protecting their investments’.

Sources of assistance..

There are numerous government and NGO supported start up schemes, many of which focus solely on certain industries — their services include mentoring, training, finance and support.

The SME market is often rejected by banks, so don’t rely on them as a certainty — however, don’t forget they are a good source of business planning advice.