08/10/2013

By Simon Dixon, Bank To The Future

There are very generous tax breaks for people who invest in businesses like yours, there is more money for investing than ever before and there is a completely new type of investor that is waiting to invest in you.

You do need to be looking in the right places to get it though.

Angels
Angels have traditionally been wealthy individuals that can afford to lose the money if they invest in you. They should understand that investing in early stage business, projects and start-ups is very risky. To manage their risk they would need to make an average of ten investments for one of them to work well. An average investment in a business like this is around £100k if they want any chance of the business going somewhere, meaning they need a minimum of £1m spare cash to invest in risky investments like early stage businesses and projects.

A conservative angel should have a maximum of ten percent of their entire portfolio in risky investments, meaning a sophisticated angel investor will need to have £10m of investable cash in order to mange a balanced portfolio and invest in you.

Banks
After the angel round, banks used to engage in business loans, but only if you can demonstrate the business can afford the interest and often required assets and personal guarantees in case all goes wrong. Give them your house as security and you used to be able to borrow the money from the bank. If you then took this money from family, angels and banks and made progress, you had the opportunity to grow fast by accessing larger pools of money from VC’s.

Venture Capital
In the UK, VC’s really only invest in businesses that have already completed an angel round, are in a fast growing market, with a good experienced team, and the potential to be a £100m turnover business in three to five years.

So if you don’t tick all of those boxes, you are wasting your time with VC’s. If you reach this stage, you have many pools of money available to you from banks, capital markets and private equity houses.

A whole new world…
Now everything has changed in two big ways…there is good news and bad news. The good news – new sources of money have opened up for you.

The bad news – old sources of finance have closed. So lets get the bad news out of the way.

Banks
As a business, entrepreneur or somebody looking to raise finance for your project, banks do not want to play with you anymore. Full Stop. Simply put, banks have choices when they make a loan. They can lend money to somebody that has a nice secure job and gets paid every month from a large company, they can lend it to somebody taking out a mortgage and if everything goes wrong they get the house. Or, they can lend it to your business which has limited liability if it all goes wrong.

If you are involved in a business with unpredictable cash flows, what will make a bank pick you? Exactly. So banks are out of the market, in fact, in the future, I don’t think they will want to play with small businesses or project finance at all. Leave the banks to credit cards and mortgages, they don’t want to help you.

Today, in the UK, there is no real VC market. They don’t want to invest in new ‘ventures’, they only want to invest once you have proven you can grow big, so not much point looking at VC’s until you have proven that your business is strapped to a rocket in a high growth market.

So where does that leave you?
Well now for the good news. VC’s do want to play, if you can prove your growth. And luckily for you, there are new sources of money in town to help you get there.

New Money
Most people call it CrowdFunding and it has changed the game. As a business or project seeking finance, there are three new sources of finance for you depending on your situation.

CrowdFunding
Here is how it works, you upload a pitch to a CrowdFunding website on how you are going to create your product / project, and you offer non-monetary rewards to the crowd. For example, you can offer a copy of your product once it is complete to those who contribute £10, a VIP party to those who contribute £100 etc. etc. You then promote this to the crowd until your funding goal is met on a set deadline. If your funding goal is met, you get the money and have to deliver upon your promises, if not, you get nothing and the money is returned.

This type of finance is most appropriate for those seeking money for a specific product or those at the idea stage and very early startup. The money does not need to be repaid and it does not cost you any equity!

CrowdLending
If you want to borrow money for your business, you are credit assessed and passed through a risk model. If you meet the criteria as a good risk, then you are matched up with hundreds of lenders who all want to lend you money at an agreed monthly repayment, interest and length.

The platform manages all repayments once you receive the money. Because there is no bank to pay, both parties get a better rate on their money. At BankToTheFuture.com we call these BankToTheFuture (BF) CrowdLoans.

This type of finance is most appropriate for businesses with good cash-flow, a good credit rating and trading history.

CrowdInvesting
Just like a public company offers shares to the public, a CrowdInvestment allows you to offer shares in your private company to the crowd online, for a desired level of equity at the valuation you set.

Instead of rewards, the crowd become shareholders or both. if you successfully meet your funding goal, the platform helps you manage investor relations once completed. Investors invest in high risk for the opportunity of dividends and exit, just like an Angel or
a VC.

The big difference is that it brings in a new source of money, as it is not restricted to just high net worth angels, it opens up investment opportunities for ordinary people and fans, supplier, customers, joint venture partners of your business. We call these BankToTheFuture (BF) CrowdInvestments. This is most appropriate for investment ready businesses that can pitch a good business case for investors.

So in summary, we are moving towards a new model of finance. Banks will serve personal debt and mortgages. CrowdFunds and CrowdInvestments will serve early stage projects and businesses. Angels will more frequently start managing their early stage investments through CrowdInvesting platforms, as the CrowdInvestment market gets more sophisticated. CrowdLoans will serve businesses seeking loans for working capital, development and growth. VC’s will serve businesses that need to scale fast in a growing market. Banks, capital markets and private equity houses will still be used for large companies.

So there you have it. Don’t waste your time with the wrong source of finance. Spend your time getting investment ready for the right source of finance, that is right for you.

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