Types and Sources of Financing for Start-up Businesses

Three venture capitalists, Michael Flowers, Reg Greenham and Lee Wang, were asked about financing business start-ups. According to Michael Flowers, when starting a new business, it is important to accept professional management, and hire an effective CEO. Entrepreneurs should, even before they begin to raise money, ask how they can use the least financing possible. They should purchase goods and services at discounts, and require customers to settle accounts promptly.

When Greenham is considering whether to finance a new venture, his biggest concern is price. 'I am always looking for great ideas and market opportunities with strong leadership, at reasonable prices.' He also looks for entrepreneurs who are able to articulate the corporate vision, and he tries to be open-minded about financing first-time entrepreneurs. He acknowledges that many investors are unwilling to back a younger person's first business.

Greenham was asked about 'angels' ñ those rich people who sometimes put money into uncertain business ventures. He agreed that angel investors can be valuable to a start-up, in particular because they can offer advice and access to useful people. He warned, however, that angel investing is becoming increasingly sophisticated, and said that in many cases it may be preferable to obtain early high-risk capital elsewhere.

Wang agrees that those entrepreneurs with some capital already can consult so-called angels. 'However, for those seeking funds for the first time, this normally involves too much time. There is no substitute for aggressively working to bring in money from family and friends. It is unlikely that bids for funding from government programmes will in reality be successful.'

Many start-up companies approach venture capitalists who manage organised funds. Greenham likes to co-invest with other venture capitalists so that there is more than one decision-maker when there are problems. He suggests that in their search for capital, companies should identify teams that have a history of successful co-operation. He adds that these investors, in turn, should always impose conditions that are reasonable.

According to Wang, too many start-up companies overlook marketing issues. 'In the early days, the founder can focus too much on the product itself, and not on how it is promoted. Entrepreneurs should also introduce customers who can attest to their entrepreneurial skills to potential investors. Also, they should think about how to give up control. It does not matter ultimately who takes charge, but entrepreneurs must develop suitable exit strategies.'