On Tuesday 22nd and Thursday 24th November, I was kindly invited by Henley Business School to present to their Undergraduate Students. The focus of the hour-long lectures was how to raise finance for your early stage business based on my own experiences of the process. This article will summarise the 6 key tips covered.
The Importance of Mentors
It is never too late to start building or improving your network. We are such a diverse bunch, and you never know when you will need to call upon the assistance of others.
At the appropriate time, you can call upon your network to take up a more formal role in your business, such as on your Advisory Board. This gives your business credibility with investors, especially if their skills are in complementary areas or can help to plug gaps in your existing knowledge. If you are a new software company for example, and come from a software engineering background, you’re also going to need sales expertise to bring on customers, so a mentor in this area could prove very helpful.
There is a multitude of funding sources out there. Whilst this is not an exhaustive list, I like to think of the main ones as a growing set of funding phases you can work through as you setup and progress with your idea.
You’re just starting out with your idea, so you can initially do it in your spare time, perhaps funding it with the proceeds from your salary in another job.
If you need a slightly larger injection of funds, you could take out a bank loan. The only downside of this is that you have to ensure you can pay the loan back based on the terms agreed!
Your friends and family have your back, and are most likely to be your number one fans as you’re starting out. You’d be surprised how supportive they can be, so do not be afraid to ask for help!
Crowdfunding is about working with your customers in a different manner, and exploring ways to receive money up front for your goods and services. For example, if you are a software vendor, move to an annual "in advance" payment plan, of if you need funds to manufacture your exciting new product, put them forward on a site such as Kickstarter.
Angels or rich individuals are some of your best sources of finance. Not only do they bring cash, they also bring knowledge. They can be hard to find, so reach out to your network first, or apply, for example to The Angel Investment Network to get matched with appropriate investors.
Seed Funds can be a way to get a large chunk of investment in one go. They typically invest up to £150K, as they take advantage of the full SEIS allowance (a government tax incentive).
Late stage investment funds will be keen to hear about you once you’ve worked through phases 1 to 6. Start introducing yourselves to the large names of the Venture Capital world following initial funding or sales traction. They will often tell you how to make initial contact with them on their websites.
Get your documentation in order
You need your business to stand out against the competition and to show you are professional. One way to do this is to ensure you have all your documents in order in advance of any meetings with investors.
It looks much better if they ask to see your financials, it sounds much better if you reply "how about I send you our investment pack which includes our business plan, financial model, competitor analysis and other key documents to support your decision, rather than "I'll pull something together and email you next week!" There are many tools out there like Dropbox where you can upload and share these documents easily.
At a minimum you should have:
- Pitch Deck
- Companies House Documentation
- Business Plan
- Financial Model (profit and loss, balance sheet, cash flow). – if you can, get an accountant to do this. Although this exercise is a "finger in the air" approach for early stage businesses, this document is more about testing your ambition and understanding of finance.
Bonus points for:
- Cap Table (Captable.io is a cool tool).This helps investors see what their share of the business will be worth after future investment rounds - and what share of the business they will have.
- Competitor Analysis. A simple matrix ticking what your product or service gives against the competition.
- Market Trends. Any documentation that tells the investor your market is growing.
- Product Pictures
- Team Summary. A one pager of your strengths and background. Remember, they are buying into you more than your idea, especially as your idea may need to pivot at a later date.
A phrase often used in the art world is "beauty is in the eye of the beholder". Businesses are the same, and therefore trying to put a value on your early stage business can be difficult.
There are many ways to value a business, and this can be a whole topic on its own. For example, 4x revenue is often quoted benchmark by investors. As you're an early stage business, you may not have the revenue to date, so it's just an idea.Therefore, if you’re raising your first investment round of £150K-£300K, you are typically going to be giving away 20% of your business, which will value your company between £500K and £1.5m. If you have the following:
- A well-researched proposition
- A product that is different from the competition
- Signs of early traction
- Solid team
- A product protected by patents
- Recurring revenue
- Operate in a growing market
- Investor-ready documentation
No one likes to be told their idea stinks, or "thanks but no thanks". Be prepared to have lots of meetings in coffee shops, and try not to take a "no" personally. Your idea may not fit with their investment criteria, but there will be an investor out there for you. When I’m getting knock backs, I like to take myself off for a long cycle ride to clear the air. Do whatever works for you to keep your head on straight and remain positive.
Raising money is not a quick process. You will have countless coffee meetings before you get that offer in the form of a Term Sheet. People's lives are hectic, so be prepared to have to factor in cancelled meetings, gaps because of holidays and so forth.
Once you’ve got that Term Sheet, the hard work really starts. You’ll need to get solicitors involved to iron out the terms of the deal ahead of signing on the dotted line and the funds being transferred.
Expect the process to take at least 2-3 months. Therefore, don't wait until it's too late to raise money - start raising it before you need it!