Luke Johnson on sources of finance for a startup

Another superb article here from Luke Johnson is ideal for teachers & students who want a realistic and up-to-date perspective on the available sources of finance for a startup….

Johnson’s stance is clear. A startup with a genuinely good idea and business model will be able to obtain finance. The issue is which kind of finance and how much. There is a bewildering choice.

Johnson describes the key differences between venture capitalists, business angels and private equity - terms which students and textbook authors often struggle to differentiate!

In Johnson’s view, business angels are the “unsung heroes” of the financial world, prepared to take risks and provide flexible finance for startups where other providers like venture capitalists and bankers fear to tread. Some really good insights in the article on the key benefits of business angel finance over venture capitalists, including:

- Business angels more nimble - can move quicker because they tend to make smaller investments
- Expect lower rates of return
- Do relatively less due diligence into their potential investments
- Make decisions quicker
- More likely to provide the startup with cash rather than complex loans
- Roll their sleeves up and get involved - passing on their experience and contacts

Johnson shares my rather negative view of banks as finance providers for startups and small businesses. I love the quote from Robert Frost used by Johnson which just about sums up the banks relationship with business:

“A bank is a place where they lend you an umbrella in fair weather and ask for it back again when it begins to rain.”

The issue is that banks are in the business of “not losing money” rather than “making money”. The average business banker (unlike their contemporaries in investment banking) is highly risk averse.