After you come up with an idea for a business, you then need to physically start a business! With starting a business comes many considerations and things you may need to learn including: hiring staff, creating your products, marketing your products, creating your sales funnels, doing your taxes, building a website and more.
One big consideration when starting a business is “Do I need to raise money”? As with many questions in business, there is no right or wrong answer; it all depends on who you are, what you are building and how you want to build it. I am a fan of ‘bootstrapping’ your first business – this is where you keep costs (and risk) low, while you are still figuring things out and learning about business. However in business ‘cash is king’ and you still may need some initial money to get going and survive. Money might be needed for marketing, product development, hiring first staff or your first few months of ‘fixed costs’ (wages, office, phone etc) while you get underway and are able to meet your ongoing costs. In addition to raising money to get going, you may want to raise money once the business is underway. This might be used for further growth and developments such as launching new products or entering new markets.
There are a variety of conventional ways to raise money for your business such as long term loans from a bank, investors, bank cards and overdrafts and business funding from government or charities. Below you will find various unconventional ways to get cash into your bank account, so you can keep the doors open until your products generate enough cash. It is important to note that the idea that ‘you need money to start a business’ is a common misconception and something that holds many people back from creating the business and life of their dreams. In some cases you do not need money to start a business – in my interviews you will see that Ela Gale started businesses that did not require any capital to get started and had minimal costs to keep going beyond that of their own time. Or as you will see below, there are a range of relatively easy ways to get money if you do need it! I have used my business Highly Flammable to give you some context as we have used many of these unconventional ways to raise money to grow the business as well as survive the rough patches!
1) Sweat Equity
Sweat equity is where you have staff, contractors or partners work for your business in return for an agreed amount of ownership in the business, rather than payment for their time or services. There are various ways to structure this and ultimately it is about having staff or contractors believe in what you are trying to build and willing invest in it. Working out the ‘value’ of an early stage business can be a complicated and confusing process and I plan to give some advice on this in a future blog article. For them there is risk as it could fall apart and you are giving up early stage ownership which you might be undervaluing or cause future issues in control and direction of the company (depending on how much you give them).
- I successfully used this with Highly Flammable in the early years with a designer friend and it meant we could build the company faster and in return he had some silent ownership in the company and he learnt a lot working inside a young business early in his own career.
2) Accrued Income Employee
Accrued income is about offering someone ‘future wages’ in return for work done today – effectively a personal loan. The amount may be paid off in bulk or over a time period, with or without interest, depending on your agreement. Usually people will agree to this if they believe in what you are building, will enjoy and learn from the job and trust you to honour your agreement. Unlike ‘Sweat Equity’ you would normally still be obligated to pay this person back, even if your company folds (but it depends on what you agree. Make sure everything is down on paper and signed by both parties).
The loan may be converted to ownership in the future if both parties agree (similar to sweat equity). Tax-wise this model can be complicated and you need to be careful and get advice from your accountant. (I have a great one if you are looking for an accountant for your business). The key here is making sure you make the agreement really clear, you do your best to honour your agreements and you are extremely grateful for their support and involvement.
- I have used this model for Highly Flammable. One of them I converted into shares eventually (see above) and the other two I paid off with extra goodwill ‘interest’ over a time period. It was hard paying off these loans and you need to take care to not overdo it creating too much future debt, however it meant we could expand Highly Flammable nationally.
3) Pre-selling and Booking Deposits.
A great way to raise money is to get really good at managing the flow of cash via pre-selling products/services and via asking for booking deposits (often 50% upfront). Essentially you sell now and deliver later and use the money you get to grow the business today (or to survive another month).
An example might be to get a 50% payment upfront today for goods that you are delivering in 3 months and use the money today to cover this month's insurance and staff wages. Or you might use the money for costs to build the product you are planning to deliver. There is a certain amount of risk involved in this, as you can end up chasing your tail and relying heavily on future booking deposits to cover work you are doing today. It is good have backup options if you run into further cashflow difficulties so you can honour your agreements and not damage your reputation. There are also plenty of ways people test ideas and products by offering them for sale online before they actually create them – though this can be a great way to validate an idea with reduced risk, but you also need to make sure what you are doing is ethical and legal too!
- I used this model to launch Highly Flammable into the North Island. We had no cash (actually we had a lot of debt due to a massive losses on an event we ran a few months earlier) but we had energy and passion. Sitting in my cold flat in Dunedin I changed our website to say ‘we have just launched our Wellington office’ and then used the cash from the first few Wellington booking deposits to invest in gear and people to deliver the booked performances in the new city! Scary, but I had the confidence we could deliver what we promised (and we did, the rest is history!).
4) Loans from Family and Friends.
This is more of a conventional way, but is often avoided or not done correctly, so worth a mention. Supportive family and friends might be willing to loan (or give) you some cash if they believe in your idea and/or in you. The more planned and proven your idea and the more clear you are about ‘how much you need and exactly what you will do with the money’ the more confidence they will have in you. So it is important to organise a proper meeting and present your idea to them in a specific planned meeting (even if it is taking Mum and Dad to a café to talk over your business plans). They might even be willing to give you a small loan to start with and then see how you use that money.
Your need to have a clear agreement in writing, even though it is family and friends, as you risk damaging relationships if it all goes wrong. Key things in the agreement include: When will it be paid back? What happens if you cannot pay it back when it is due? Will there be any ownership or interest with it? Is the loan you you or to your company? It is also important to update them as the business grows as they would likely want to hear about how it is going and be involved in some of it.
- I have used this several times with Highly Flammable – for growth and investment and also when I needed it to keep the doors open. I find it is really hard to ask family and friends for money, especially if it is during a downtime in the business (avoid getting to that stage!), but I have found people to be extremely supportive and generous. As well as the much needed financial support, I have appreciated the involvement and ideas from people who have loaned some money. Financial support also shows they believe in you, which is a powerful motivator! People are not always looking for a financial gain, but they often want to help others and be part of something!
5) Keep Your Day Job
Keeping your day job can mean you have the security and ability to cover your own personal bills and potentially cover some early stage business costs. Having a job also keeps the bank happy and makes them more likely to give you a loan, visa card or overdraft. Having a day job is also a good way to keep a routine (which many entrepreneurs struggle with) and can provide you with the opportunities to discuss your ideas with workmates, apply/test/practice your learnings in your day job and even build your network for your business.
The flipside is you are now juggling a day job with a business and trying to fit everything in! You need to balance your time effectively – checking email during breaks (or inside of work if you can get away with it), working on your business before and after work and on weekends.
It is a very smart idea to keep your day job initially while you learn about business and get the foundation underway. It means there is less risk involved and you can work towards going full time on your business when the time is right. Some jobs may even let you transition to part time and some jobs might even offer you freelance /contract /casual work after you leave! You will need to decide whether you tell your boss about your business or not (some people do, some don’t).
If you don’t have a day job already or want to get out of your current job, then consider ANY job to work part time while you get your business going. Maybe it is not that glamorous or fun, maybe it's making coffee or pouring beer, but at least it helps you pay your bills so your business can survive and thrive without the stress of you needing to be paid. Plus you will get the bonus of some structure and routine in your life and you can practice your pitching and getting feedback on your ideas from customers!
- I started Highly Flammable during university so did not experience this transition, though I technically had a part time job at Uni as well as a student loan to cover my living expenses. I have seen a variety of friends do it successfully and I think it is a great model to consider for your first business.
A great way to provide some early stage finance is to do some freelance or consulting work on the side. This is effectively where you sell your time in exchange for offering a service in an area that you are an expert in. Everyone has an area of expertise that has value to others. Or it could be an area that you are just ‘really good at’, or even just better at than those you can help! For example many young people are great at using social media (not technically experts) and can offer older people tonnes of great support and advice.
These days the Internet has plenty of information on any topic and you can even pick up a skill very quickly and then teach it! Many people learn the skill of SEO (Search Engine Optimisation) and then offer it as a service to others for a fee. You can also utilise tools like skype and offer your services to a global audience!
This income can help you cover your own living expenses if your new business is not quite able to pay you. You can also choose how often you do it to suit your other time commitments. Freelance income can sometimes be a great way to build a client list, brand or confidence to launch a proper more scalable business model off the back of too!
- To help supplement my Highly Flammable income, I have done a variety of freelance jobs over the years including running social media workshops and guest lecturing in entrepreneurship. Ironically my work in lecturing entrepreneurship went so well and I enjoyed it so much that I now do it quite frequently and I launched this business ‘Entrepreneurs Adventures’ off the back of it!
The great thing about launching a business while at University or other tertiary study is that you can live super cheaply and survive off your student loan. People also have less expectations of you when you are studying and therefore you tend to spend less money on things like gifts and dinners out with friends and family (though often people are super supportive of you when you are starting your business too). At University you also have amazing access to great people to learn from and get advice from such as other students and lecturers! You can also apply your learnings in real time, especially if you happen to be studying business (I was doing the Masters of Entrepreneurship when I started my business)!
- I launched Highly Flammable whilst at University and was able to live off my student loan (plus a part time job) which meant any revenue from performances could be reinvested into the company's development. And I certainly made the most of being at University and had a range of my lecturers as great business mentors to me too!
Crowdfunding is a relatively new form of funding. Effectively you say you need to raise money to do x and then ‘the crowd’ funds it through small (or large) donations, usually in return for a reward/gift or an early version of a product that you will create. A friend of mine from my Masters, Anna Guenther, setup PledgeMe.com which is a popular crowdfunding platform in New Zealand. In addition to helping charitable projects and artists (help fund a musician's next album), there are also tonnes of examples where businesses have used Crowdfunding to launch. A good friend of mine, Agnieszka Nazaruk, used Crowdfunding platform Kickstarter to fund the launch an innovative business called Getniwa.com, which produces a system that allows you to grow food from your own home, controlled via an app!
- We used Crowdfunding at Highly Flammable to fund the Mirrorman World Tour and found that in addition to getting the funds needed, it is also about building a supportive crowd and community that will help you generate word of mouth marketing and future feedback on your ideas!
9) Equity Crowdfunding
Equity crowdfunding is similar to standard crowdfunding, except instead of a donation, people get a return on their funds via some shares in the business. For example you might want to raise $100,000 and if you value the company at $900,000 then you are giving 10% of the company (1 Million Dollar total value) in return for the cash. This money is raised ‘through the crowd’ so the shares are split across several or potentially hundreds of people. Usually (though not always) the whole amount required needs to be raised for any of the funds to be accessed or the funds are returned (the ‘all or nothing model’). This leverages the crowd effect where good projects get funded as enough people believe in it and are willing to fund it if enough other people agree that it is a good idea. Anna Guenther’s business ‘Pledge Me’ also now offers Equity Crowdfunding after a law change in New Zealand (there are a number of companies in New Zealand now offering this and other countries are starting to legalise this form of capital raising).
- I have not used Equity Crowdfunding for Highly Flammable yet, though I think it will be worth considering in the future.
10) Crowd Lending
Crowd lending is very new and only just starting out in New Zealand. The basic idea is that instead of going to the bank, that you can loan money from ‘that crowd’ and offer interest in return. Watch this space as it has potential to be highly disruptive....
- I have not used Crowd Lending for Highly Flammable yet, but wish I had the option to use such a thing in the past!