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[VIDEO] The 3 essential pieces of information you need to finance your business

This four-part series is based on interviews with CEO and founder of RealVNC, Dr Andy Harter. In these interviews, Andy tells us how he grew a small tech startup into a future billion dollar company.

Been in business for several years? Launching a new start-up? Cash flow challenges? Whatever your stage in business, creative financial intelligence is a must-have skill as it will provide you with answers to one of the most common questions: "where on Earth am I going to get the capital?"

If you haven't quite developed your financial acumen, fear not intrepid entrepreneur! We were privileged to sit with Dr Andy Harter, CEO and co-founder of RealVNC, who shared several financial tips on how he raised finance at each stage of his journey from start-up when releasing a free open-source program to running a large SME now rumoured to become the next billion dollar company.

In this article, we examine the three financing options discussed in our interview with Dr Harter and the pros and cons of each.

Organic Growth

Organic growth is a long-term strategy and in general is the best strategy for people new to business. Organic growth essentially means relying on no external funding, and ensuring that your business is initially run on limited budgets or even the founders' savings.

From many investors' perspectives, learning to manage and budget at a "lower" startup level enables many would be entrepreneurs to learn vital business lessons without needing to go through a spectacular financial failure. Some of these financial business lessons include:

  • How to juggle a variety of budgets
  • How to market and sell to bring in profits for further growth
  • How to manage resources
  • How to negotiate for the best prices

Bearing in mind the 80-20 rule where 80 per cent of businesses fail (normally due to lack of money) within the first 24 months, organic growth allows you to develop the processes and the survival skills necessary for the success of this or a future business.

In RealVNC's story, until there was a proven business, Dr Harter refused to look any further for investment.

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Once you have a business plan in place, backed by an active operational plan, plus you've had enough proof of concept and can no longer develop without further finance then you can progress to outside investment.

Although organic growth is a long-term strategy, the lack of sufficient available capital will prevent the business from rapid growth compared to those that get cash influxes from other sources. Similarly, depending on your personal financial situation, you may not have the funds to bring onboard another team member or someone who can take on extra responsibilities. Ironically, this may sound like a disadvantage but if you have not had experience dealing with rapid expansion then extra funding may actually be a disadvantage as spending on non-essentials may occur.

"FFF" or friends, family and fools

Dr Harter believes that should you seek the external investment avenue, then the best source of finance is the three "F"s: family, friends and fools.

Naturally "fools" is a lighthearted joke to go with the alliteration scheme but there are people out there who'll invest in something they know very little about. If you have a persuasive pitch or well-written information, there are those who are happy to "gamble" on you. The three advantages of the three "F" financing option are:

  • They don't need to have shares
  • They don't require as much in return
  • They don't scrutinise your business plan as much

Using "FFF" as a financing option can be a double-edged sword. Professional investors understand the risks involved and will mitigate the risks to minimise both emotional and financial damage. Friends and family are investing in your business because of who you are and should your enterprise fail it could damage that relationship you have with them.

The lack of business wisdom or ability is also an issue with this financing option. Professional investors have gotten where they have through creating successful enterprises and by making their own mistakes in the building of their earlier businesses. Professional investors have the knowledge and acumen to help your business flourish and to help it through the rough patches.

Crowd Funding

Before crowd-funding platforms like Kickstarter and IndieGoGo became popular, Dr Hartner sold t-shirts bearing the message "I love VNC" to build up enough funds to seed RealVNC as a company.

There are four main ways to crowd fund. If this option is of interest, you'll need to think about which type of crowd-funding is best suited to your enterprise:

  • Donation-based crowd-funding: Backers essentially donate money to support a cause. Sometimes they will receive in exchange a "thank you", a special mention, or even a gadget, in any case the pledge is essentially a gratuity.
  • Reward-based crowd-funding: Backers receive a reward with a clear monetary value in exchange of the pledge. The reward is often a product or a pre-series item that the backer helped produce by pledging money. This method is essentially the same as placing a pre-order of a product or service.
  • Credit-based (aka peer-to-peer lending) crowd-funding: The backer lends the money and receives an interest rate in exchange. In this case the money is pledged in the form of a credit loan.
  • Equity-based crowd-funding: Backers receive shares of a company in exchange of the money pledged. In this case the money is pledged in the form of risk capital.

The major reason why crowd-funding worked so well for Dr Harter at this particular part of the RealVNC journey is because his team had released VNC several years earlier as a free open-source program and therefore RealVNC already had a "crowd" who were interested in supporting VNC.

In Dr Harter's words, "we tapped into the millions using our free software" and "we had something our customers wanted, that they valued, and that they wanted to be continued in some way."

You only have to view the statistics of crowd-funding sites such as Kickstarter to know that crowd-funding does not work for everyone. One lesson to learn from RealVNC in order to ensure you have a successful journey with crowd-funding is to already have a substantial following of users or fan base in Twitter, Linked-in, Facebook or any of the other social media sites.

However the important thing about crowd funding is that most of the time investors will not add value to your enterprise. The majority of backers will either be consumer entrepreneurs or a "fool," and you'll face similar issues to the three "F" financing option.

What's best for your enterprise?

There is a huge range of options for financing an enterprise, and unfortunately we can't tell you which will work for you. However here is a quick summary of each of the options:

  • Organic growth: Great for learning essential entrepreneurial skills and maintaining absolute control over your business. However it makes business expansion incredibly slow and you may have to fund yourself and your business through working another job.
  • FFF: Great for not having to give away much of your business and they're less likely to want much in return for their investment. However they're unlikely to offer anything to you apart from moral support, and if you fail you may suffer from guilt of letting them down.
  • Crowd funding: Very similar to FFF but easier to raise a higher amount as the "crowd" is likely larger than your family and friendship group. However the multitude of investors are unlikely to add much value to your enterprise, and unless you already have a product you may find it difficult to find a crowd.

In part one (opens in new tab) of the series Dr Harter reveals the one overlooked secret to success. In part two (opens in new tab) of the series Dr Harter reveals how he grew a tech startup into a billion dollar company, and finally in part four (opens in new tab), Dr Harter looks at when companies should acquire new tech and when they absolutely shouldn't.

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