Finding funding: from friends to banks

Every startup needs capital, but where do you find it? From family and business angels to investment funds and banks, each source has its pros and cons. This guide helps you navigate the options and make smart financing decisions.

Family, friends and fools (fff)

After you have invested some of your own money in your business, you may find out that some of your friends and family are also willing to provide you with money in exchange for shares. The amounts are usually limited, unless you have a rich aunt.

Keep in mind that these people have a lot of trust in you. Therefore it is crucial that they are aware of the fact that whenever thing go wrong, they might lose their money. Make sure to emphasise this time and time again because if things do go wrong, this could cause strife in your family. So they need to invest money that they can truly spare. It is even recommended that they use only a part (about five percent) of the money they can spare. Also keep in mind that family, friends and fools usually provide no added value when it comes to business. Chances are that they even only understand your business to a limited extent. If they do decide to get involved in your business this could be very annoying. Make it clear that you expect them to be silent partners and they will not have a seat on the Board of Directors.

Business Angels

Business Angels are (former) entrepreneurs who are willing to invest in promising, starting or fast growing companies. They usually invest in the range of 25,000 to 250,000 euros.

Some Business Angels work individually, others work together in the frame­ work of the Business Angels Network (e.g. for Belgium: BAN Vlaanderen). BAN Vlaanderen is not an investment fund but rather a meeting place for Business Angels who decide individually if they want to invest in a company or project. The associated Business Angels are notified through an anonymous flash card (which contains key data about your case). BAN Vlaanderen regularly organises "match making" events, which give the entrepreneurs the opportunity to introduce their project to potential investors.

Because of their background Business Angels will gladly help starters and they often claim that they are able to contribute their own know-how, experience and contacts. While this is probably true always be appropriately sceptical and view things from the right perspective. Make certain that the Business Angel has a background in the industry in which your company operates. If so, his reputation can deliver customers and suppliers. Make sure there is chemistry with the Business Angel-entrepreneur, as your cooperation will mostly be on a relatively informal basis.

Take into account that after a few years of growth, the Business Angel will want to orchestrate an "exit". The shares will then be sold again for a certain surplus value.

Possibly the Business Angel is an alternative financing source which could be a step up to traditional financing sources. In other words: the participation of the Business Angel lowers the threshold for other investors to follow suit.

Investment funds

Investment funds manage the assets of several large investors for whom they try to achieve objectives, that have been agreed in advance. An investor does not make a random investment. Usually specific agreements concerning target markets, type of investment, magnitude of the sums, risks, selection criteria, maturity of the investment file, exit strategies, efficiency, etc., have been carefully considered.

The relationship with an investment fund is a lot more formal than with Business Angels. The professional managers of the investment fund report to their board of directors. Usually they are rewarded if they achieve positive results.

Some interface services from knowledge institutions have their own such capital funds.

If you decide to call upon these capital funds, we strongly recommend you to approach the different capital providers simultaneously and compare the various conditions. This is the only way to understand the differences in the conditions of the various funds. Contact 10 VC funds, and try to negotiate a deal with at least three of them.

Stock exchange

Companies go to the stock market to raise capital. This is usually not the case for young starting companies. Instead it applies to companies with a proven track record who are looking for additional capital in order to be able to grow. Specialised investment bankers usually give advice.

External expertise

In some cases we recommend appealing to external experts to assist you with your finances. This is definitely the case if you need a lot of capital, for example a couple of million euros.

These experts charge a fee, which depends on the success they achieve. Generally this is a percentage of the amount raised. You could negotiate a "no cure no pay" clause. This obviously depends on your individual case and its potential. The number of institutions or experts is relatively limited. Check their track record and their credentials with people you can trust.

These experts can help you draw up a presentation and an introduction to candidate investors. However, convincing the investors is still your job!

Banks

You can ask a bank for money. As mentioned earlier, banks will only provide the money if you can give them some form of guarantee. At first glance this may scare you off but it is worthwhile considering doing this. The money the bank will give you is money you will not have to raise somewhere else in exchange for shares.

Leasing equipment can be an interesting way of "borrowing money". It allows you to buy certain equipment with a monthly sum. If you cannot make the payment, the bank will invoke its guarantee: it will confiscate the equipment and try to sell it in order to limit the damage.

“Always work with two or three banks, never just one. Don’t hesitate to take out a product, even if you only need it for a couple of months. Instead of dipping into your savings, consider a short-term bridge loan - it helps build a strong relationship with the bank. And don’t be afraid to be assertive. I had a contact who completely failed me, but after pushing back, I got a new one who now knows my business inside out and always responds within an hour. Having the right banking partner makes all the difference." Leen Peeters - founder and manager of Think-E

You can also open a line of credit with a bank. This allows you to withdraw money in the short term, which you will pay back later. The bank will grant you a line of credit if it is confident that you can repay the borrowed sums. This means you can make a payment while you are waiting for sums owed to you to be deposited into your account.

Finally: what you should NEVER do is take out a mortgage on your house or other assets (which belong to yourself or your family) as a guarantee. If nobody is prepared to invest in your project and a mortgage is the only option then something is seriously wrong with your case. Do not make things worse by taking out a mortgage on your assets.

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