Entrepreneurs without money (IX). What type of financing is available for entrepreneurs?
Good afternoon. I was supposed to be on vacations until tomorrow, but I couldn´t cope with not writing to you. So, we started to write yesterday, and since I work from my parents´ home we will continue doing it today, exploring what type of financing is available for entrepreneurs.
As mentioned yesterday, Ernst & Young prepared a visualization graph for the Small and Medium Enterprises (SME) funding instruments, which I recreated it in a powerpoint slide so you can see it much better:
If you wish to download it in PDF, click here please: Eliescalante Aout 2018 Entrepreneurs without money IX.
The same EY report “Funding the future: Access to finance for entrepreneurs in the G20”, shows us the following infographic:
If you wish to see the last slide in PDF, click here: EY SME funding G20 2012.
Even though the last graph is from the year 2012, we would like to analyze this because it gives us a hint of what is happening in each G20 country. EY remarks that “despite being key engines of economic growth, SMEs attract just a tiny proportion of the overall investment in the G20 countries. Not all SMEs are entrepreneurial, but they provide the best approximation for international comparisons of entrepreneurial funding. Overall investment in SMEs across the G20 stands at US$714 billion, 6.2% of the total US$11,507 billion spend on all other forms of investment. By far the biggest share of this comes from bank lending, at US$569 billion. Looking at the funding picture in individual countries, China dominates with investment in SMEs of just over US$400 billion, of which US$385 billion is bank lending. The United States follows at around US$116 billion. Funding in many G20 countries is dominated by bank lending, although the US stands out as offering a more diverse range of debt and equity finance mechanisms”. Personally, I see this, and I think: this is insane. I can´t agree with the way SME funding works. Bank lending can´t be the source of funding for entrepreneurs at pre-seed, seed, and start-up phases.
Access to finance to young or mature entrepreneurs in any country is very difficult. It is not a “piece of cake” to be pampered as an entrepreneur. Particularly during pre-seed or seed phases where each of us has been more or less in a “valley of death” stage.
Pre-Seed and Seed phases are seen as higher risk zones by investors, and in consequence, the sources of funding are expensive and limited. If the entrepreneur is lucky enough to live in a country with a top premium developed entrepreneurship ecosystem, it will be possible to access an incubator or accelerator (usually in universities or bureaus backed by government non-reimbursable funds). “The purpose of an incubator or accelerator is to help us to go from an idea to a start-up”. “Business incubation programs are often sponsored by private companies or municipal entities and public institutions, such as colleges and universities. Their goal is to help create and grow young businesses by providing them with the necessary support, access to finance and technical services“. But these services are not free. Usually, entrepreneurs spend an average of two years in a business incubator sharing the costs of the office and manufacturing space, in an effort to reduce expenses.
Pre-Seed and Seed phases should be the most important phases for entrepreneurs. The design thinking, prototype, launching several pilot projects and correcting mistakes to explore the demand, are usually effective in this phase, and entrepreneurs do not have the economic resources to do them well. Venture Capital firms and banks come after (when the company is growing at accelerated speed). Crowdfunding has been an option lately. Crowdfunding is about persuading individuals to each give you a small amount of money (donation, debt or equity financing). Amounts range as less as $10, $50, $100 to maybe more. “Once you get thousands of donors, you have some serious cash on hand”. There are several donor crowdfunding internet platforms available for it, and these fundraising websites charge an average success fee of 5 percent. In addition, debt or equity crowdfunding platforms have their own concept pricing, and unique value proposition, which we invite you to explore. Some of the most famous are Kickstarter, Circleup, Indiegogo, Gofundme, Microventures, etc.
The worst thing an entrepreneur in pre-seed or seed phases can do is to look for a bank loan or credit card funding. It is the worst recipe for sinking your boat before starting to sail. Of course, there are a few exceptions to this, but Eleonora Escalante Strategy recommends to look for other sources of funds such as grants, donors, non-reimbursable aid, apply to entrepreneurship contests to win a prize in cash (watch here: https://grasshopper.com/blog/startup-competition-guide/). Remember, never use debt at these initial stages! Never is never. No credit cards funding. No personal loans. No lending of any type. NEVER.
To be continued…
San Salvador, 7 August 2018. 17:57 pm (CST)
Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
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