In our regular series, Andy Yates, a serial entrepreneur and angel investor, gives start-ups and growth companies tips and advice on how to overcome challenges and achieve their goals.
If I had a pound for every time somebody has asked me how they raise money for their start-up – I could give up helping start-ups and retire.
So first – a major reality check. So many entrepreneurs I have come across believe raising money is a breeze but then get caught in a whirlwind.
The reality is at any one time it is conservatively estimated that more than 100,000 businesses in the UK are looking for funding. Only a tiny percentage ever get it.
Even then, most businesses that raise money raise thousands, not the hundreds of thousands or millions you hear about in the press – from companies that can afford some good PR.
There are now a plethora of ways in which budding entrepreneurs can raise cash on their business venture – but each method has its pros and cons
Need vs greed
So the first question any start-up should ask is do I really need the money?
The best way to fund your business is to sell more. In other words roll up your sleeves, keep costs low and go and get your first clients.
And funding product development with real sales has a real impact on your valuation if you want to raise money in the future.
The second best option is to raise money from family and friends.
People who know you already are more likely to give you money than strangers, and a lot of businesses are never going to be big enough or scalable enough to get external investors.
Around nine out of 10 start-ups fail, so to ever make any money investors have to back businesses with the potential to grow more than 10 times in size.
If you are always going to be a relatively small business there is nothing wrong with that at all. In fact anybody setting up, running a business and earning a living should be very proud of themselves.
But businesses that are not scalable or don’t have a big enough market potential or want to remain small and manageable – should not seek investment.
The reason I started with the points above is that raising money from investors is not the easy option so many entrepreneurs think it is.
Be prepared for between three to six months, and often longer, of full time, flat out effort to raise any sort of material sum.
That is three to six months plus that you’re not running your business and making sales.
Raising investment also means you need to be prepared to give up some control over key decisions and the future direction of the business – which is certainly not for everyone when push comes to shove.
Still interested? OK let me give you the warts and all summary of key fund raising options.
Crowdfunding – bring your own crowd
I support a business called Craved – which curates great British food and drink from small independent producers and provides beautiful gifts for businesses and consumers.
Craved recently successfully raised more than £200,000 in equity via crowdfunding site Crowdcube to really grow and scale their business and team – which is great news.
But even though Craved is an established, successful and growing British business and brand it learnt the following lessons:
- Come with your own crowd.
- You need to fund far more of the raise from your own supporters, investors and community to get the wider crowd interested, as investors are spoilt for choice when it comes to crowdfunding opportunities.
- You need to spend a lot up front on marketing campaigns, videos and materials to get your message across.
- Finding larger investors that make a real difference to any fund raising round remains as difficult as ever.
- Never underestimate the work and time it takes to raise investment.
In other words only consider raising money via crowdfunding – whether you are seeking backing for a project or product or raising equity – if you can really stand out from the crowd.
Angel investment – angels can be saints if you are not a sinner
Some of the valuations placed on early stage companies seeking angel (or indeed crowdfunding) investment are quite frankly ridiculous.
This is a partly a factor of generous tax breaks angel investors can receive for backing such companies.
However, all this serves to do is store up problems for the future.
When the money runs out and the tax breaks, or angel investors’ patience, has been exhausted then so many companies get sucked into a funding black hole they can’t get out of.
So be sensible on valuation. Seek angels that can help you and most of all don’t come with just an idea, a slick presentation and a fancy spreadsheet.
Show you have put in some hard graft in the real world – or your start-up bubble will soon burst.
Go and talk to clients – get some early sales on board.
Prove customers like your product or service and want to buy more of it and would recommend it. I sense that increasingly angels – who again are spoilt for choice for companies they can back – are getting weary of entrepreneurs that lack substance or progress.
Building a website or app or presentation is easy and cheap these days. Building a business is as hard as ever.
Business angels can add value by not only investing capital but offering their well-honed business expertise to start-up firms
Venture capital – don’t bank on it
Forget it! OK this doesn’t apply to the elite few that manage to raise early and raise big. But the reality is most businesses will never raise VC funding and never should.
This sort of funding is usually reserved for ideas or businesses that have proved their market and at the tipping point of real and sustainable scale, but need the capital (to normally pump into marketing and product development) to get there.
But don’t be fooled. Venture capital companies know the game and in my view are relatively risk averse compared to angel investors.
They usually want proven models and traction. They want real evidence about the cost per acquisition of a customer, their lifetime value and a clear route to gaining a lot more customers. They want to oil the wheels of the machine, not build the machine from scratch.
Then just when you think you have proved enough – they want more.
And if you think you are giving up some control getting angel investment – then that is nothing compared to your average venture capital round.
Conclusion: Raising hard cash is hard work
If you want to raise investment my advice is to go into it with your eyes wide open. Do the hard work up front to prove your business and its potential.
If you think there is easy money to be had you will soon find yourself in a very difficult spot.
If you have a great business, some sales, reasonable valuation and expectations and, after all I have said, are still looking for investment then tell me more via LinkedIn
Small Business Essentials