Starting up in a world with no money

Banks loans may be hard to come by - but entrepreneurs have other ways to raise capital.

by
Last Updated: 31 Aug 2010

At this week's Entrepreneur Country forum, the theme was 'doing business in a world with no money' - how can start-ups can get off the ground at a time when raising capital is so difficult? The Government may have been trying its best to persuade banks to part with their money, but lending and private investment are still at rock-bottom levels - so start-ups need to get creative to survive...
 
‘A world with no money’ may be a bit of an exaggeration, but it’s difficult to deny that businesses are finding it harder to borrow. The economy might be officially in recovery, but according to figures from the British Bankers’ Association, new lending dropped again in April, to just £529m. The venture capital market is just as difficult: Hussein Kanji, one of the speakers at the forum and a former investor at Accel Partners, said series-A funding had dropped from 80 deals in 2005 to just 17 last year. As Kanji said, these are ‘staggeringly low’ numbers.
 
It’s not necessarily a new problem, though. Alex Cheatle, who founded Ten Lifestyle Management in 2003, says banks have never been reliable lenders. ‘Banks have never been good at lending to business. They didn’t used to lend, and they don’t lend any more. They’d lend you money if you wanted to buy a property – but it was quite uncommon for a bank to lend you money for your business.’
 
And since the onset of recession, businesses have found other ways of raising capital; they’ve just had to be more imaginative about it. It’s not exactly a coincidence that crowd funding (raising finance by selling small shares of the business to customers in return for a say in how it is run) has become popular in the past three years. And successfully bootstrapped businesses have started to use their frugal histories as something of a badge of honour – not least because technology has dramatically pushed down the cost of starting up, allowing entrepreneurs to easily outsource anything from branding to payroll.
 
Businesses have also been forced to concentrate on the bottom line: instead of wasting time on loan applications, they’ve learned to go out and get customers. ‘You see it again and again on Dragons’ Den, don’t you?’ says Cheatle. ‘They say they need money, but you think, well, why don’t you make 10, then sell 10; make 20, sell 20; make 50, sell 50 – and you’re off.’ In other words, if you need a high level of investment to start with, it might not be the right business to start at the moment. ‘You’ve got to ask yourself: if customers aren’t willing to pay for it, why are you doing it?’
 
Of course, there comes a time in the life of any start-up when instead of scrimping, it needs to start focusing on growth. And entrepreneur Rob Hersov, another speaker at the event, reckons now is the time to start investing again. At the moment, it’s as if we’re ‘sailing without any wind’; markets aren’t panicking, but they are quiet. ‘When the market comes back, it’s going to be so strong, you’re going to want to already be in the market, not starting.’ So invest now – and reap the rewards later.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today