Most businesses don’t make it big on passion and graft alone. To properly get off the ground and start proving your ideas in the real world, you’re going to need some capital. Stock, equipment, marketing and skills – all of these things cost money and, until you start turning a profit, that early-phase spending can be tough.
Unless you’ve got some fairly hefty savings behind you, investment and/or loans are usually the only way to get the early cash injections you need. But the world of finance can be pretty daunting to the uninitiated. The jargon, the options, the process – it’s all a bit bewildering.
Should you aim for the maximum you can get? Or focus on agreeing the most convenient T&Cs? What are Angel Investors, Seed Funding, and Incubator Programmes? Will an investor gain control of your business decisions? And how on earth can you convince anyone to hand over the moolah?
It’s a lot to work out, so you need to get as clued up as you can, and fast. The kind of investment you gain in the early stages can shape the future of your business – and determine its success. So, it’s crucial that you get it right.
To help you out, we’ve put together the ultimate guide to everything you need to know about startup funding, including the pros and cons of the main options, the process you’ll go through, as well as some hints on how to land the big bucks.
To start off, it’s worth asking a crucial question: Do you even need investment?
If your overheads are small, or you’ve already got capital behind your idea, you may think that it’s not worth the bother, or the additional risk. And that’s perfectly fine. However, investment isn’t just about making a quick buck with which to buy shiny things. Investment is about buying time.
When you’re starting out, the most important thing to do – the thing which will guarantee your success later down the line – is to prove your product and/or business model. This is where you should be concentrating all your energies. You can worry about profit margins later – right now, you need to get to grips with what you’re doing, why you’re doing it, and how you’re doing it.
That’s tricky if you’re spending half your time trying to sell, sell, sell. Selling is important, of course, but everything is experimentation at this point – including your marketing and sales process. Investment will give you a buffer with which to hone and refine your techniques, so that you can build up some metaphorical market muscle without crashing and burning.
There are disadvantages to bringing in investors, of course. It would be wrong of us to pretend that it’s all dollar signs and shiny toys! Investors don’t (usually) give something for nothing. You could end up tied into more responsibility than you really want at this stage, with restrictive contracts or external controlling stakes. Or you could find yourself moving too fast, too soon, as investors push for returns. However, if you’re careful about getting the right kind of investment – the right kind of deal for your business – you’re likely to set sail in a more stable position than may otherwise be the case.
This is where it can get confusing for the unprepared. There are many, many options for startup funding. The world of investment is large and labyrinthine-like, which can be off-putting for many startups. But it’s really not as tricky as it seems at first glance.
There are several basic options for investment, which we’ll walk you through below:
There’s a certain amount of flex within these options (and this is by no means an exhaustive list.) But getting your head around the different avenues and what they mean, will give you a valuable head start in your search.
It’s not just about knowing what kind of investment options are out there, of course. It also helps enormously if you know what kind of shape the investment process is likely to take.
Investment timescales and procedures seem as confusing at first sight as everything else. From seed funding to series A, B and C, it sounds worryingly like a conveyer belt that you jump on as a founder, before being automatically shunted along to the different stages.
In fairness, it is a bit like that. But everyone’s conveyor belt is slightly different, depending on the individual business and its needs. So if you know how each stage works, you’ll be better able to decide when and how your business should source the funds it needs to keep moving forward.
To give you an idea, here’s a typical timeline of the investment stages, when they tend to happen, and what they’re used for:
1. Family and friends Bootstrapping with your savings is only sustainable for so long. You may have an early-stage prototype to work with, or a decent business plan. But with little to show investors, it’s too early to go through a more formal funding round. That’s where your friends and family come in! Research shows that around a third of startups do this and it’s a great way to tide you over for a few months while you develop your brilliant idea.
2. Seed round The money from your friends and family probably won’t last long, so it’s important to build a decent prototype or MVP (Minimum Viable Product) as quickly as you can. You need an MVP in order to start courting ‘seed investors’ – primarily angel investors - who ‘seed fund’ your business by providing a flow of money as and when you need it, up to a certain amount. With your business still in an embryonic state, this money will be invaluable for taking it to the next stage, which may mean bringing your product to market, building your team, or investing in design, branding and marketing.
3. Series A This tends to happen once your product or service is pretty clearly defined, you’ve launched to market, and built up some solid traction with your customer base. In the series rounds, you’re usually talking to venture capitalists, and Series A is typically required to optimise your product and user base, perhaps monetise your service if you haven’t already done so. You’ve shown your idea works and there’s a market for it - now it’s time to perfect it.
4. Series B By this stage, you have a well-established business. You’ve got a strong team behind you, your product is well-managed, your marketing is doing its magic and your customers are buying your product or service. Series B is all about building and scaling your venture, through taking on staff, investing in marketing and advertising, perhaps expanding into new markets. You might even be considering acquisition at this stage, to bring in new technology, or remove the threat of a competitor.
5. Series C There is no limit on the number of series rounds a business can go through, and series C is effectively a continuation of A and B, enabling you to invest in the areas that need an injection of cash to take the business to the next level. It can also be used for what is known as ‘bridge funding’, to help the business prepare for an IPO (Initial Public Offering) or sale. By this point, you’ll be raising hundreds of millions of pounds for your company.
6. IPO or sale The final step! Many entrepreneurs go for years before reaching this point, and many businesses are staying private for longer – just look at Uber and Airbnb. But most entrepreneurs and their investors want to cash out eventually. An IPO gives you a way of raising cash quickly and giving your investors greater liquidity, so their money is no longer tied up in the business. The other option is to sell your company to a competitor, or perhaps a private equity firm, to take it to the next stage of its journey, leaving you to move onto pastures new.
So, you know roughly what you should be looking for and when. Now it’s time to start honing in on potential investment partners. But before you start blasting out emails to all and sundry, lay the groundwork through the following:
Many a founder has tied themselves in knots over valuations. But to know how much you can expect to get, you need to have at least a rough idea of how much you’re worth.
Search online and you can find various complicated models for how to approach pinning a price tag on your business. Feel free to browse the intricacies of EBITDA, Comparable analysis and DCF Analysis for some cosy bedtime reading!
The truth, however, is that when you’re fresh out of the box, and your figures and your forecasts are more guesswork than anything else, fitting your burgeoning business into a headache-inducing equation can be a waste of time and effort. And in many cases, it isn’t the first thing investors are looking for anyway.
So, what’s the best approach?
I. Be realistic: Excessively high valuations can scare people off, so don’t get carried away. All investors are essentially taking a leap of faith in a business, so if you present a massively high valuation without any solid evidence to back it up, you’re going to look a bit too naive to risk doing business with. Unless you’ve got a market-ready product, a ton of customers already lined up and some solid figures, don’t pull gigantic numbers out of the air. Investors like to see realism and a degree of common sense – waving around unrealistic profit projections isn’t going to help with that.
III. Don’t get distracted by other businesses: Startups often base their valuations on figures released by other businesses in the same industry, but this can be misleading - particularly if you’re comparing numbers with American companies, which tend to be valued much higher – as much as double – their European counterparts. It’s not a competition.
IV. Give your business room to grow: Investors expect your metric to increase with each funding round, so allow for that. What will secure you greater investment in subsequent funding rounds is proof of growth and progression over time – which won’t be evident if your metrics show you wallowing in the same pool of money, with no growth. Consider the perspective of the investor. They don’t want their stake to just sit there – they want it to work at increasing the company’s value, and therefore the value. Think always of giving the figures room to rise!
V. Be ready to negotiate: Remember the ‘endowment effect’. Business founders tend to value things that they have made themselves far higher than outsiders would (for obvious reasons!) VC firms are aware of this, and always take the endowment effect into consideration when settling upon a final figure. So, be prepared to negotiate and compromise. Don’t get upset when your potential investors counter with an offer that’s lower than what you anticipated, and don’t be greedy. Negotiate until you hit upon a deal which works for everyone.
VI. Put the business first: Don’t take disagreements about valuation to heart and always prioritise the business, particularly when agreeing on the split of equity partnerships. Your priority should be the future of the business - 10% of nothing is still nothing, so is it worth falling out over small differences in equity share? If your co-founder is the right business partner, equity split can be sorted later. The biggest problem is if the business falls apart.
Valuing a business can seem like a big deal but try to keep it in perspective. The key is finding the right team, advisors and investors, who understand where you’re going and want to help you get there. Get that right, and everything else should fall into place.
We've also spoken to Alexander Mann of Concentric Venture Capital and Angel Investor Lucy Viggers about how to value early stage businesses for investment.
You’ve done your research and you know what you’re after. The next step is preparing a pitch deck – probably the most important tool in your investment arsenal.
Contrary to what the name suggests you won’t always be using your pitch deck to ‘pitch’ – not in the Dragon’ Den sense anyway. Networking and getting introductions to the right people is central to winning investment, which means your deck will often get forwarded around various people before it hits its mark. Your deck must therefore stand on its own, containing all the key information you want to get across, even if you’re not there to physically present it.
So, what should a winning pitch deck cover?
Core content and structure
There’s a pretty standard structure that most businesses follow, and it looks something like this:
What’s your ‘why?’ You need to start with a bang, so make sure your initial slides are extremely compelling. Short and punchy is better – you should be able to describe what you do in one sentence. The role of this slide is to make your reader click through to the next one.
What problem are you solving? All investors love a good story, so make sure you bring this to life, explaining the inspiration behind your product or service, and the difference it makes to your customers’ lives. If you can relate it to your own personal experiences, all the better.
And how? Here you can delve more into the details. What are your offering, how is it unique, and what are the main benefits for the customer?
What’s the secret sauce? Explain the technology underpinning your product. What are the crown jewels that enable you to solve problems with current services? Avoid ‘buzzword bingo’, by throwing in terms like AI, IoT and Blockchain to get attention. Investors have heard it all before, so instead, focus on how you’re using the tech in novel ways to solve old problems.
Show the traction you’re making: As a startup you won’t necessarily have loads of customers and sales under your belt, but investors want to see that your products and services have been successfully tested in the market, even if it’s in a limited way. If you’ve done beta tests include reviews from these, or details of the size of your waiting list, if you have one. Awards and PR coverage can also be great proof points.
Identify the competition: It’s important to show that you’re aware of the wider market and who could potentially threaten your plans for global dominance. This enables you to highlight once again how your offering is different and where there’s a gap in the market for a new way of doing things, in answer to current trends, or to cater for currently underserved consumers. Don’t belittle the competition but do show why your offer is better.
Sell your business model: All of the above is pointless if the sums don’t add up, so be clear on how you’re making money from your idea! Fans of Dragons Den will know this is usually where contestants trip up, so don’t leave any room for confusion. Having said that, don’t go overboard with financial details or other metrics in your presentation itself. Keep it to the key figures, then be prepared to add more colour around these when you meet, or as a follow up. Scroll up and re-read our advice on valuing your business, if it helps at this point.
Talk about your team: People buy people, so introduce your whole team. Showcase the aggregated and personal wisdom you’ve built around you. This should include any advisors and existing investors you have on board.
What you’re after: Finally, don’t forget to ask what you’re actually asking for in terms of investment, what you’re planning to use the cash for and how it will help you achieve your business goals.
Remember, we've rounded up everything you need in our Startup investor pitch deck.
Ensure you spend plenty of time honing your pitch deck, as well as perfecting it based on feedback from investors and others in your network. Then with a bit of luck, you’ll soon be rewarded with plenty of investor meetings in the diary!
First, a word of warning – investors receive hundreds of ‘world changing’ business ideas every week. Perseverance is the name of the game!
A good first step is to drop them an email or give them a call to pre-qualify your interest. Keep it short, relevant and personal – they can smell a bulk email a mile away.
Many investors provide guidance on their website on how to approach them – read it! And if you can get an introduction from a mutual contact, all the better. Check LinkedIn to see if you know any of the same people.
When it comes to setting up a pitch, if you have the option, aim for a more casual introduction or meeting over a formal process. But you should always be ready for every eventuality, including more structured pitching processes.
If you’ve done your prep properly, you should be all set! But here’s a few final tips for making a good impression on the day:
So the pitch is out of the way and there’s an offer on the table – job done! Well, not quite. Before you bite their hand off, just take a moment to evaluate whether the chemistry felt right from your side of the table.
For example, did they ask the right questions and show that they understand your vision? Do they meet any other criteria you have, such as industry experience, contacts or complementary skills?
If the answer is yes, then fantastic. If not, then consider whether you can live with the sacrifice - or if you’d rather hold out for a better offer.
Also, it might seem crazy but do your investors actually have sufficient funds to finance the deal? While it’s not unusual for investors to finance some of their investment with bank loans, make sure it’s not more than 50 per cent of the equity. Otherwise you could end up with a mountain of debt you didn’t bargain for!
Also, do your best to avoid time wasters. Some investors have lots of meetings, but never commit. Don’t be sucked in!
The kind of startup funding you secure really can make (or break) your business. It’s so important to get it right.
This means not just thinking about the number of zeroes, but also the kind of person you want to deal with, how much equity and control you’re prepared to relinquish, your future (and exit) plans - and much more. This means making a serious commitment to putting a lot of graft in. Pitching for finance is a full-time job! Every investment round feeds into the next, so your approach to investment has to be nuanced, and fit in to a long-term strategy.
Of course, nothing is set in stone. At the end of the day, you’re dealing with human beings, and there’s a lot of variation in what different investors will offer you and what they’ll expect in return. The best you can do is research your options thoroughly, polish your pitch deck until it shines, and put your negotiating hat on.
And last but not least – have persistence! If your ‘perfect’ investor says no, don’t be disheartened. They are plenty more fish in the sea, so be resilient and try to learn as much as possible from each experience.
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