Attracting Entrepreneurial Finance
Attracting Entrepreneurial Finance
For my first contribution I intend starting by defining the meaning of entrepreneur'. Whilst this may, at first sight, seem a strange starting point for an article on finance, I intend to use this definition to demonstrate the key to the entrepreneur attracting finance for their venture and the decision processes that they need to go through.
Particularly over the last forty years there has been much academic research to try and understand the mindset of the entrepreneur and people would be forgiven for thinking that the entrepreneur was a new phenomenon. However, even the academics have been theorising about the entrepreneur since the 17th and 18th centuries.
But if all of the theories are distilled, the entrepreneur is someone who has a new invention or innovation and who has the will to develop that idea into something of value and the ability to deliver it. In reality, entrepreneurs are much more likely to come up with an innovation than an invention. In other words, entrepreneurs are more likely to adapt existing technology or processes to produce something with value than to create something entirely new. For example, even the motor car was an innovation and not an invention. The person that came up with it took the existing steam engine and the horse drawn carriage and adapted it. Another example is the adaptation of the paper drinking straw to a plastic one.
Innovation usually attracts funding much easier than invention as the potential funder will find it easier to understand the potential of an improvement in what exists rather than a totally new concept.
The motor car is also a good example of the fact that innovations take time to become commercially viable. In the early days the expected market for cars was very low as it was assumed that all cars would need a chauffeur and there were a limited number of people that could afford this luxury. So the growth of the car was slow in the early stages.
This leads to the second consideration when attracting finance. Any financial plan has to show a realistic build up of sales. Even if the entrepreneur believes that everyone will want one, a realistic financial plan that builds over a sensible period of time is critical in convincing potential funders.
A key component of any proposal for funding is a realistic expectation of return on investment. This leads one to realise that the innovation or invention has to have a value. That value has to mean that someone will want it, but it also means that the value is sufficient for people to want to pay a profitable price.
It is why entrepreneurs often do not come from research and development organisations. Engineers and technicians often spend time producing things that add no value. Their satisfaction comes from the development itself rather than its commercial viability. Developing something that has less components is not itself a valuable innovation. It only becomes so if it reduces costs, production times, reliability or some other benefit.
This means that entrepreneurs need to show that their innovation will provide a return that is attractive to a potential investor.
What is already clear is that the entrepreneur has to have a creative side to them but that they also need business acumen in order to be able to identify benefits and value. However, that in itself is not enough. Many theories about entrepreneurs talk about risk and the need for the entrepreneur to be prepared to take risks. Indeed, in neurological studies of entrepreneurs, the only discernable difference in their brains is their reduced reaction to risky situations.
Any proposal for finance has to recognise that there is a potential risk in any new venture. Good market research will help to reduce the risk, but only once the innovation is implemented can one be really sure that it will work the way it was anticipated. That is not to say that the entrepreneur has to be pessimistic, merely realistic. If the entrepreneur has little belief then a prospective financier will have little belief also.
So in looking at the attributes of a true entrepreneur that will appeal to financing one is looking for a combination of creativity and enthusiasm that is balanced by a clear knowledge of business that can produce a well reasoned business plan.
However, there are two other things to consider when looking for finance. Firstly, however excited the entrepreneur is about their innovation, the financier is going to be most concerned about the finances. Too many people get fifteen minutes in front of a prospective financial and talk for fourteen minutes about the innovation and one minute about the finances. Try reversing the proportions and you will stand a better chance.
Secondly, many people want to start their own business because they want to be their own boss rather than working for someone else. Be aware that many forms of external funding will require the funder to take some control of the business. If you don't want that then external funding may not be the answer.
Look at whether you can cut your own funding requirements by reduced stock levels, extended credit and good accounting and don't discount personal funding options. One of the most common is using your credit cards and personal finance. Dell was started from a university dormitory with capital of $1000 and last year was number 33 in the Fortune 500.
Finally, you are never too young to become an innovator. Indeed, the further you go in life constrained by norms and conventions the more difficult it becomes to be an innovator. Try this simple test. If you were given a third eye where would you put it? If you say that you would put it at the back of your head you fail! It is already easy enough to swivel your head to see behind. If you need a clue then ask a child. If you cannot ask a child then I will cover it next month when I talk more about youth businesses.
Attracting Entrepreneurial Finance
By: Roger Cowdrey
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