FarmDrop entrepreneur Ben Pugh has shared some insights about investing in a start-up business.
Despite having to worry about sales, marketing, distribution and innumerable administrative tasks as a start-up, he explained the main worry is running out of cash before the business begins to make money.
As a result, he argues controlling cash flow is probably the most important task for many entrepreneurs.
FarmDrop is an online business matching local fresh food suppliers with customers.
First, he suggests, is looking at your business and deciding what the best type of funding suits your set-up.
Risk and investment
Sharing equity is one option, while debt finance from a bank is another for entrepreneurs with assets to put up as security.
“In the end investors and the bank both want the same thing,” said Pugh. “They want to see you have confidence in your own business by making an investment.”
Investors and banks do not want to take on all the risk for a share of the profits. They want to see entrepreneurs are willing to share the risk as well.
After putting up your own money, look for investment – and spend some time gaining a thorough overview of the Seed Enterprise Investment Scheme (SEIS) and crowdfunding to expand the investment base away from personal contacts, friends and family.
SEIS offers significant tax breaks to investors that minimise the risk of losing money.
They include a 50% tax relief on tax paid on investments of up to £100,000, a 50% capital gains tax exemption on assets sold to raise cash for the investment and if the business fails, loss relief against other income.
All these reliefs depend on the SEIS lasting for three years.
Business valuation for investors is a deal make or breaker – set it too high and investment is unlikely to come your way, says Pugh.
For TV’s Dragon’s Den viewers, they will have seen hapless entrepreneurs overvaluing a business with no assets or sales being chastised for outlandish funding pleas.
“Getting the right people in by offering share options can keep salaries down, but as the business grows, stock options reduce in favour of bigger salaries,” said Pugh.
Once a business has funding, don’t waste the cash. Look to work on a shoestring and keep costs down.
Offer barter time, products and services for what you want and haggle over prices, explains Pugh.