Tip 1: Explore all your start-up and SME funding options
Many start-ups are not aware of the entirety of funding options available to them. What works for one business may not be suitable for another.
We recommend aspiring entrepreneurs do their due diligence and explore all their financing opportunities before they start. Don’t just limit yourself to one or two funding routes like angel investment or venture capital.
Conrad Ford, CEO Funding Options states:
There are literally dozens of ways to finance your business, depending on your stage, sector or location. The trick is knowing where to look.
Peter Skelton, from UK company formation agency The Company Warehouse, supports this view:
There are lots of funding sources out there including grants, partnerships and competitions as well as loans. It is also worth looking for free or discounted office space, mentoring and R&D help through local councils and universities which can reduce the amount of funding you need to get. Make sure you have thought about how you will market your business. Our research has found that 90% of new businesses don’t budget for online marketing costs which can make it difficult for them to get enough customers.
Here are just some of the funding options available to you:
- home equity release
- credit card
- product pre-sales
- crowd funding
- angel investments
- venture capital
- family & friends
Jonathan Littlewood, from crowdfunding resource site Crowdfunding Websites, gives us more insight into crowdfunding as an option for start-ups:
If you do decide to look at crowdfunding for your business there are a number of types available to you that will suit different industry sectors and the stage a business is in. Generally speaking for pre-revenue businesses with an exciting retail product offering you might consider a rewards based crowdfunding campaign. For a business within it’s first one to two years of trading equity based crowdfunding could be the best option. If your business has been trading for more than two years, is looking relatively healthy and is ready for the next stage of growth a peer to peer loan is probably right for you.
Why is it so important to research all your funding options?
Your choice of funding will determine how you move forward with your plan. Make sure you don’t miss out on a financing option that might fit you and your business and could leave you in a better position for the long term.
For example, funding your business with the help of a bank may seem like a great option as you’re not giving away any of your company; however, even if the bank agrees to supplying you with funds they are often more restrictive in how much they lend in order to minimise any potential losses.
On the flip side, angel investors may be more inclined to take the risk and offer you more funds than the bank on the premise that it may return more. This larger investment will more often than not come with a price as they have greater expectations.
Keeping your investors happy may even interfere with key business decisions. Of course the right investor may also bring about a wealth of experience to help you on your journey.
Tip 2: Ask for the RIGHT amount of money
It sounds simple but asking for the right amount of money is a key part of successfully raising funding. The obvious amount you should attempt to secure is probably as much as you can. Is this wise though? Should it not be tailored to your goals?
For example, is your objective to create a minimum viable product, do you need proof your concept will work, are you trying to build a community, perhaps you need to attract early adopters or ultimately you need the capital to generate revenue? All these outcomes will require a different amount of funding.
Martin Keighery, head of lending at Funding Knight, gives this advice on the importance of being realistic in terms of your funding expectations:
Be realistic in what you can expect to raise via debt finance, and consider alternatives strategically in line with where you wish to take your business. There are a variety of ways to obtain capital to support your enterprise and you should think carefully about how best you can blend personal equity, external investment, senior debt and alternative finance. The right blend should provide you with the right liquidity at the right cost to run your business successfully.
You should evaluate what you have on offer and at what stage your company is at. If you’re still at idea stage your valuation will be much lower than if you have a prototype, or better still proven revenue. Asking for too much too early and you’re likely to relinquish more equity than you may need to at a later date.
Rebecca Weir, co-founder of Isansys and Head of Business Development, states:
Having first prototype developed and CE marked on founders & friend’s money, meant we could raise £1.5 million Series A [first round funding] at a good valuation with minimal dilution.
Asking for the wrong amount of money is not always asking for too much. Investors are wary of small investments running out before they have any tangible return. Many small businesses have failed simply because they were under capitalised or had no ‘buffer’ amount or contingency plan.
Toby Peters, Chief Executive, Dearman believes:
It’s vital to be realistic and think long-term about how much R&D and commercialisation will cost. In 2015 we received £19.5 million of investment, which will enable Dearman to bring its revolutionary technology to market.
In addition, smaller investments may be less attractive as the return will be less. Being realistic about what you need and clearly explaining why you need it will enhance your credibility with potential investors.
Knowing how much you need will allow you to revisit your funding options and cross off any that are not relevant.
Tip 3: Research – know your numbers and present credible figures
Make sure your figures stack up and do your research. Nothing will put off an investor more than if you don’t know important information. It’s even worse if what you’re presenting is simply not realistic or feasible.
For example, basing your valuation on a global market worth billions is not representative to your opportunity. Realistic, well-researched projections may help persuade investors that your proposition is the one to take seriously.
Stephen Page, CEO of Start-up Funding Club, reiterates this point:
Whilst 3 year forecasts are important to get investors comfortable, managing the first 6-12 months cash flow forecast is more critical for survival and planning for further investment. How much you raise is not your decision. It will be a complex amalgam of what is possible at your stage of growth and what investors risk appetite is as well as your valuation and its realism. Most valuations are too high. Be careful not to over value your business or you will delay fund raising and lose your advantage to competitors. Be realistic, remember investors have to see a return on investment.
Kelsey Lynn-Skinner, Director Tech Ventures, Imperial Innovations states:
Investors want a big market combined with a realistic, detail-oriented go-to-market approach that together demonstrates both ambition and knowledge of the market – not to mention a backable entrepreneur!
Focus your research on your niche, audience, opportunity, market segment, demographics, market share, competitors and anything else that an investor will want to know before investing in your enterprise.
Ayan Mitra, Chief Executive at crowdfunding platform CrowdBnk, recommends that you should have a client facing member of the team, who is comfortable answering any numbers-based questions investors may throw at you:
No matter what size your company is, or how little time it’s been in existence, knowing your numbers is a key pre-requisite for successfully growing your business. As a crowdfunding platform, CrowdBnk encourages all the start-ups it encounters to share its passion for numbers and realistic projections. Ideally, a new company seeking investors should have a client facing member of the team who can handle even the most taxing of questions. Knowing your way around the bookkeeping will ensure that investors take you seriously.
Tip 4: Present an awesome business plan
The old cliché, ‘You never get a second chance to make a first impression’ rings true when pursuing funding. Inaccurate figures, out of date market research, presented via a weak pitch will undermine your efforts by masking a potentially great idea, so make sure:
- your business plan and figures roll off your tongue
- double check everything
- create an engaging pitch deck
Nigel Walker, Head of Access to Finance, Innovate UK offers this advice:
Presentations tell a compelling story from how you create and deliver value for customers, to capturing value for yourself and your investors. Business plans show the details of how you will turn that story into a reality.
Rassami Hok Ljungberg, from start-up events and networking company 2Pears, gives her advice for what makes a pitch compelling:
Our experience of training over 950 start-ups to pitch shows that the best, most impactful pitches are short, sharp, succinct, and to the point. Show why your idea is unique and disruptive, and - most importantly - how you will deliver a return on investment.
What should be included in the business plan?
Ultimately, you will have to articulate with confidence everything that an investor will need to hear in order to make a decision. Your plan should include the following (and more):
- Your vision
- USP (unique selling point)
- Target audience
- Use of funds
- Financial projections
- Realistic milestones
- Revenue model
- Credible team
- Exit opportunity
Gabbi Cahane, mentor on CFE’s Fash-Tech programme, outlines three important things to remember when pitching:
There are 3 things to keep in mind when you are pitching:
- Start off with something really powerful – an idea that you fire into someone’s head that they can’t get out.
- Really demonstrate your credibility, because at the seed funding stage, it is the team that is being invested in.
- Try and understand the audience you’ve got in front of you – speak the language they understand.
Matt Kuppers, CEO of start-up consulting & education business Startup Manufactory, adds further guidance from his vast experience in entrepreneurship:
Before you approach potential investors, make sure you have rehearsed your pitch multiple times over with friends and family. Investors normally give entrepreneurs one chance to pitch so make sure you don’t spoil it. Also, make sure you cover all the essential points in a short and snappy 10min presentation. Otherwise, you start losing your audience. There are many useful resources out there that help with pitch-training and rehearsals, so utilise them wisely.
It can be nerve racking so make sure you’re pitch perfect.
Tip 5: Plan enough time for fundraising
The road to funding can be a long one. Even a great proposition and well-researched business plan, can’t bypass delays. Make sure you and your business can survive until funding is secured.
Rebecca Weir, co-founder of Isansys and Head of Business Development demonstrates this with her experience:
Healthcare is slow, even with great product and traction, our first fundraising round took 6 months and was a full-time job on top of running the business! We needed to be very capital efficient.
How long will it take to secure funding?
Acquiring funding typically takes several months, but you should always plan for the worst case scenario and delays. You don’t want to be in a situation where you desperately need cash when you’re working on deal terms as this may cause you to accept terms you’re not comfortable with.
Here is a list of some of the time related hurdles you may have to plan for and navigate:
- Diary Issues
- Investor due diligence
- Prolonged decisions
- Legal requirements
Thea Fisher, analyst at retail and consumer innovation investors TrueStart, reveals just how time-consuming fundraising can be:
Fundraising can be a full-time job in and of itself, and you want to ensure that you are doing it on your terms. Your pitch will change from round to round, and if it is your first time seeking fundraising, make sure you have a strong list of targets, and you meet with the friendliest ones first—with each meeting, your pitch will improve, and you’ll grow accustomed to some of the questions you field. Try and concentrate investor meetings in one period, so plan accordingly (people tend to be away in August and December, so you may struggle to keep to your timeline if you are seeking meetings then, for instance).
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