I’ve been asked to advise Liverpool John Moores University entrepreneur students on getting finance for their new businesses.
Controversially, my view on finance for young entrepreneurs would be, don’t.
Here’s what I would recommend:
a) avoid finance if at all possible and always for as long as possible – learn to beg, borrow and barter
b) focus on the ability to implement – not the idea
c) no one will invest in your idea unless you can sell – so what proof do you have of sales skills?
The only exception are silicon valley type VCs which invest heavily in ideas from untested entrepreneurs. If this is the kind of project and experience that you offer, then your best bet would be to catch a plane to San Francisco as this is extreme high risk investing and most investors are not willing to do this.
The essence here is that you have to be offering to create not only new customers (the standard definition of entrepreneurship) but also a new industry. But be careful, this is not as easy as it sounds – and many young entrepreneurs fall for this mistake. (See the business parable of the Rock that Wouldn’t Budge).
New industries don’t come along often, so, a VC is going to expect a high risk (or potentially very high risk) to the enterprise in return for a huge ‘google’ like return.
However, the more normal path to investment is essentially, don’t take investment in stage one, but look at investment in stage two and three – and what investors would look for at these stages.
You can define these stages as
- Idea – pre-sales
- Sales – pre-profit
- Profit – pre-national or global expansion
If you approach investors at stage 1, then you need a track record because the likelihood of the idea failing is very high – and not least because you may or may not know what you are doing!.
The only way to reduce risk – once the idea is proven as new and potentially interesting – is to focus on the management team.
If you are still young and inexperienced and approach investors at stage one, then expect the investors to demand a majority stake for a small cash investment, which is a bad deal for you, and the investors know it.
So, any entrepreneur worth his salt is going to reject such a poor deal and work on the idea until sales are proven and preferably profitable.
At these later stages the young entrepreneur can already show a degree of resourcefulness and ability to implement. Now, you are no longer the greenhorn entrepreneur, but someone with a proven (albeit limited) ability to make stuff happen.
Hence, at stage one, you must begin by Begging, Borrowing from rich uncles and aunts and Bartering.
Learn the rule of the 3Bs – Begging, Borrowing and Bartering – first, and then you will find raising funds infinitely easier – not least, because you won’t need so much money.