Show me the money
So, you have this awesome side hustle idea – all you need is the funding.
Or is it?
We hear the stories about Airbnb, Uber and other disruptive technology companies that take the world by storm and we assume that the one thing that made them different was funding – money.
Please understand that there is no such thing as free cash. No one wants to give away their hard-earned cash for free. I get messages of ‘equity for work’ quite often. The owner of the business must have the most to lose. And it’s best to keep it like that until you’re at a point where you have proved that the business will work – but that’s just my opinion.
Though I will discuss some options for funding, I want to also look at this idea that we ‘need funding’.
Some startups need money
The other day a lady contacted me requesting funding. She saw a gap in her area selling hair products such as fake hair, nail products and beauty stuff (Frugal knows nothing of these things). I decided to play devil’s advocate: does she really need funding?
I asked her why she wouldn’t consider finding her first client and buying what was needed for the one client, and scaling it like this. She responded that it wouldn’t be worth it for her – she rather wanted to fund so she could go big.
Many industries need money to make it worth their while. Yet, this often happens at the cost of learning about the industry.
What you don’t know you don’t know
Imagine this lady finding funding and buying the stock she needed. The following scenarios could play out:
- She is able to sell all her products (yay!)
- Half her products get sold – and she learns through this error what her customers want, but at the cost of the investor
- She sells nothing – she didn’t learn anything and the investor is angry as he has technically lost his money.
In the best-case scenario, she found the gap in the market right the first time – which is a rare thing. Almost as rare as brewing an internationally recognised coffee with your plunger at home. It happens but is a purple cow.
Generally, small businesses need to fail several times before they are successful. Make sure you learn from your mistakes!
Learning is the process of discovering what you don’t know.
The 100 Bucks Business
Technology has enabled us to find customers much much easier (see the article here!). For this reason, I believe that many businesses can be started with as little as R 100.
With a little creativity, we can think of ways to learn before we jump. We can maybe buy only one product, 3D print a prototype, get a single client for your hot sauce, write an article for your blog and share it.
We should rather consider using what we have.
Imagine if you can get one paying customer – the emotional boost it will give you can propel you into the future! For me, this is the aim of a small/micro business – get one paying client and grow your business from there.
There is no other way, I need funding
There are many reasons why someone might say that they need funding – which is fully legit:
- You might want to expand and need funding – e.g. franchising
- The market that you’re entering has a high barrier of entry – e.g. buying and selling cars might require quite some money to buy your first car – and you cannot connect the buyer and seller as easily as you want
- Economies of scale: The equipment/time/money needed to make one batch vs 5 batches are about the same – e.g. frozen dinners, manufacturing processes, “un-leanable” mobile and web apps*
We cannot deny that you sometimes do need funding. For these, there are some options available to you.
*My made-up word un-leanable refers to projects needing a single leap, rather than small increments.
When applying for funding, you get roughly three ways they look at it:
- A loan – they would want their money back with interest.
- Equity – the person wants shares in the company that you’re building
- A freebie – the person is nice and is willing to give you money for free. This is a very rare thing, indeed!
Funding can come in many forms and shapes. It can come from many places: from your own pocket, a business, a business partner to strangers or even the government. Let’s talk about the options here.
Self-funded and family/friends
Some people decide to create a registered company for their side hustle, startup or small business. This enables them to lend money to the company, and get it back tax-free – with the interest of course! Though this might be a complicated way of doing it, it makes sense that you need to keep your business and personal interests separate. Remember: you don’t want to spend more than what you’re making without a plan and a prospect of growing!
Many people go to family and friends and borrow money for a business. Generally, this is the best bet for low-interest loans – yet is devastating if you cannot pay back the money. Many people start out like this, as you don’t have to give away shares in your company just yet.
At some point family and friends will not be able to sustain the lending and borrowing. When this happens, other options need to be considered.
In some cases, it makes sense to get a business partner with money to help you. I have a good friend that saw someone selling shoes. He helped the person sell 3 pairs of shoes at his restaurant – it sold out on day one. The second day he sold his 6 pairs, and so on. After a week, my friend offered a partnership with the gentleman – a 50 % stake in his company for a capital injection.
This made sense, as the proven business venture was able to get the money to make it viable.
Quite often, a business partner will be someone in your network. It’s important that you bring complementary skills – everyone needs to bring something to the table.
Venture capitalists and banks
Banks sometimes do offer loans to small businesses. They are a bit fussy though and require loads of documentation. You can imagine the banks see startups as high risk, as they have no surety. It might be worthhwile to speak to a bank to get a feel for the products on offer.
Over the last few years, venture capitalists (VCs) and VC companies have become more prominent in the startup revolution. These people will offer you money for an equity stake in your company. You will need to answer to them if things go south – they will be your ‘boss’. Your new boss might sometimes help you grow and scale, find new clients and meddle into your business affairs.
To get funding from a VC, you will need to pitch. Generally, you would need the following in place:
- Proof that people are willing to buy the product
- Proof that the product will be scalable
- A pitch deck – a small presentation with your projection, the basic idea, etc.
- Financial projections, business plan, marketing plan, etc.
In some cases, you might come across an angel investor. These people don’t want to get involved in your business. They allow you to run your business yourself and will only pester you when they want their returns.
Funds, grants and government agencies
The South African government has a couple of grants available that might either help you fund your idea or exchange equity for money. There are also government agencies that can help you get everything you need in place to make you grow your business.
Some of these include:
- Support Programme for Industrial Innovation (SPII Grant) – more info here
- Small Enterprise Finance Agency (SEFA) :
- National Empowerment Fund (NEF)
- Small Enterprise Development Agency
I am not a fan of giving away equity for free – if I don’t have to.
If you can grow your business organically and learn in the process, do so!
If your idea needs funding, then the above should at least point you in the right direction.
I want to do a special mention here of crowdfunding. This is where you tell people on a website about your product and they can pre-order. In recent years this has become quite popular for people who have an idea and want to validate if the idea works.