RAISING MONEY
Alternative models
Since the start of the economic
downturn that started in 2008,
several innovative and more
personal types of funding, such
as crowdfunding and peer-to-peer
(P2P) lending, have evolved and
blossomed on the internet. All
involve the principle of raising
small amounts of money from large
numbers of individuals who pool
their resources to provide the loan
or equity needed.
CREDIT ANALYSIS CRITERIA FOR LENDING
Capacity
The borrower’s ability to repay the
loan is shown by the business plan.
Capital
The borrower’s net worth is assessed
to check that assets exceed debts.
Character
The lender usually looks for a
borrower with a good credit history.
Collateral
The borrower is often expected to
pledge an asset that can be sold to
pay off the loan if funds are too low
to pay the monthly interest or repay
the capital at the end of the term.
Conditions
The lender is swayed by the current
economic climate as well as by the
sum requested.
Life cycle of
investment
The key to successful funding is to
choose the right type of finance
at each stage of a company’s early
growth. Start-ups usually begin
modestly, with self-funding and help
from friends, family, and anyone else
who is prepared to take a high risk.
Crowdfunders and business angels
are amateurs willing the entrepreneur
to succeed, while venture capitalists
become interested when the level of
risk goes down and they can expect
a healthy profit in return for injecting
substantial funds. Public markets such
as stock exchanges may step in as
sales soar and success looks probable.
At all stages, investors will conduct
credit analyis to asses a company’s
ability to repay its debt.
S
e
e
d
I
d
e
a
Revenue
time
R
i
s
k
investment
C
r
o
w
d
f
u
n
d
e
r
s
F
o
u
n
d
e
r
s
,
f
r
i
e
n
d
s
,
f
a
m
i
l
y
(
F
F
F
)
$
$
US_034-037_Raising_Money.indd 36 21/11/2014 14:23
36 37
how companies work
Start-ups
Start-up finance of small and medium-sized enterprises (SMEs)
The chart shows sources of start-up finance of SMEs over a three-year period in the UK, taken
from a 2004 survey by Warwick Business School. Most funding comes from individual savings,
and least from equity (shares), a type of investment associated more with larger companies.
66%
12.5%
10%
5%
5%
1.5%
E
a
r
l
y
M
i
d
L
a
t
e
Personal
savings
Friends and
family
Bank
loan
Home
mortgage
No funds
used
Equity
investment
r
i
s
k
sales
V
e
n
t
u
r
e
c
a
p
i
t
a
l
i
s
t
s
P
u
b
l
i
c
m
a
r
k
e
t
s
B
u
s
i
n
e
s
s
a
n
g
e
l
s
$
$
US_034-037_Raising_Money.indd 37 21/11/2014 14:23
36 37
how companies work
Start-ups
Start-up finance of small and medium-sized enterprises (SMEs)
The chart shows sources of start-up finance of SMEs over a three-year period in the UK, taken
from a 2004 survey by Warwick Business School. Most funding comes from individual savings,
and least from equity (shares), a type of investment associated more with larger companies.
66%
12.5%
10%
5%
5%
1.5%
E
a
r
l
y
M
i
d
L
a
t
e
Personal
savings
Friends and
family
Bank
loan
Home
mortgage
No funds
used
Equity
investment
r
i
s
k
sales
V
e
n
t
u
r
e
c
a
p
i
t
a
l
i
s
t
s
P
u
b
l
i
c
m
a
r
k
e
t
s
B
u
s
i
n
e
s
s
a
n
g
e
l
s
$
$
US_034-037_Raising_Money.indd 37 21/11/2014 14:23
How it works
Business accelerators and incubators provide expertise
and connections in the formative stages of a business
in return for a percentage of ownership. They are
two separate types of services. Business accelerators
are short-term programs that offer wide-ranging
support including mentorship, business advice,
and connections to potential sources of financing.
Business incubators, on the other hand, provide a
supportive environment in which fledgling start-ups
can develop, with technical assistance, working space,
and networking opportunities.
Business accelerators
and incubators
Starting a new venture can be a long process. Business (also called
venture) accelerators and incubators are specialized organizations
devoted to developing and supporting start-ups.
Business accelerators
Suited to start-ups that have limited financing, accelerators offer short–term (one
to three months) boot camps. Clients include web and software developers.
Seed capital
Management
of intellectual
property
Marketing
advice
Accounting
and financial
services advice
Access to
mentors and
advisory
boards
Help with bank
loans, funds
and guarantees
programs
Links to
potential
investors
Introduction
to potential
partners
Networking
Start-up pays
accelerator % of
equity in the business.
In return, accelerator
provides help and
services.
$
$
$
US_038-039_Business_Accelerators_And_Incubators.indd 38 15/12/2014 12:55
38 39
HOW COMPANIES WORK
Start-ups
Incubator networks
Collaboration of incubation
centers, research facilities,
and science parks
Virtual business incubator
Online hothouse for start-ups
NEED TO KNOW
Start-up
introduced
to
incubator
Support and education
Specialized facilities such as
science laboratories
Interaction with
other start-ups
Office space to
work from
Seed money
to get started
Mentorship
Start-up pays
incubator %
of equity in the
business. It may
also pay rent to
share part of the
incubator’s work
space. In return,
it receives a range
of benefits.
Business incubators
Often sponsored by nonprofit
organizations, incubators tend to be
longer term (one to five years) and
cater for a variety of clients, many
science-based.
33
months
the average time
US start-ups spent
in an incubator,
during 1999–2002
US_038-039_Business_Accelerators_And_Incubators.indd 39 15/12/2014 12:55
38 39
HOW COMPANIES WORK
Start-ups
Incubator networks
Collaboration of incubation
centers, research facilities,
and science parks
Virtual business incubator
Online hothouse for start-ups
NEED TO KNOW
Start-up
introduced
to
incubator
Support and education
Specialized facilities such as
science laboratories
Interaction with
other start-ups
Office space to
work from
Seed money
to get started
Mentorship
Start-up pays
incubator %
of equity in the
business. It may
also pay rent to
share part of the
incubator’s work
space. In return,
it receives a range
of benefits.
Business incubators
Often sponsored by nonprofit
organizations, incubators tend to be
longer term (one to five years) and
cater for a variety of clients, many
science-based.
33
months
the average time
US start-ups spent
in an incubator,
during 1999–2002
US_038-039_Business_Accelerators_And_Incubators.indd 39 15/12/2014 12:55
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