Neil Dillon, MBA 2021, Equity Manager at Swoop Funding and VP of LBS Launchpad, delves deep into the many ways startups can find funding. Many startups that Neil works with have raised through these means or Neil is helping them directly through his work at Swoop Funding.
There are many ways to peel a kiwi and even more ways to fund a startup, but knowing which type of funding best suits your needs can be difficult. Perhaps you’ve got an idea but you need the money to make it a reality. Or maybe you’re running a new business that’s in a position to grow. Either way, you’re likely to be making some crucial decisions that will no doubt determine whether your business succeeds – or not – especially if you’re dealing with the negative effects of the coronavirus pandemic.
Perhaps, like many entrepreneurs, you’ve used your own savings to launch a business. In any case, you might now need to decide whether you’ll use your own money or someone else’s to drive your business forward. I want to help shed some light on some of the options available to you. I’m focussing here on five stages of equity finance: bootstrapping, family and friends, angel investment, crowdfunding and venture capital. It’s important to note that some businesses might pass through all these stages in succession, while others might skip some stages – or may need only one type of funding to make their business work. If you’re looking at equity finance you’ll probably have decided against debt finance, which I’m not covering here.
Many entrepreneurs choose to do it alone. If you’re in this camp, you’re probably highly resourceful and you haven’t been blinded by the bright lights of venture capital (VC). You might still seek VC funding at a later date but for now you’re happy to build your business using your own savings or early profits.
While this may not be the most glamorous route, it can feel very rewarding. There are many reasons you might decide to bootstrap your business, e.g.
- to maintain control of the business
- to wholly own the business
- because you can’t attract investors (e.g. if your business has a slow growth trajectory).
When you bootstrap, be prepared to:
- work from home or use co-working spaces
- watch those expenses
- do your own publicity
- oh, and watch those expenses!
Your growth curve will likely be much slower than if you had secured investment but, if you succeed, your struggles and challenges will all be worth it when you own 100% of the business and the profits are all yours.
Family and Friends Round
Many founders will be lucky enough to have a strong network of family and friends on hand to lend moral support and advice – and if you’re really lucky, to put money into your business. This sort of raise is usually between £10,000 and £150,000.
Here are some top tips to avoid any tears:
- Keep it professional and use proper documentation
No matter how close you are with your investors, money can complicate things. Be business-like when you pitch to family and friends. Tell them about your business model and let them be convinced by the merits of the business, rather than your personal need. If you remove emotion from the transaction there’s less likely to be resentment later. Documentation is a must, both for obvious legal reasons and to demonstrate to your investor(s) that this is a real commitment – it’s an exchange of money for equity in your company.
- Detail the risk involved
Your friends will want to help, but don’t let them get carried away with all the potential upside. Remind them that most start-ups fail – or at least don’t grow as much as initially hoped. Make them aware of the risks of their investment.
- Don’t dilute too much
It might seem like a good idea to give a good chunk of equity to your loved ones, but don’t dilute the ownership too much or it will prove very difficult to raise money via VCs or angels in later rounds. Like any win-win negotiation or transaction, both sides should feel they’ve got a good deal.
Business angels are usually high net worth individuals who have experience investing in early-stage businesses and may be entrepreneurs themselves. Angels are more motivated by a return on investment (compared to family and friends) but are usually knowledgeable about a specific industry and can provide valuable guidance – and contacts. Cheque sizes range from £10,000 to £250,000 but are typically £20,000 to £50,000.
Getting an audience with Angels is notoriously difficult unless you have a lot of rich friends. Finding them is the first hurdle. You should spin your rolodex and double check your long distant cousins aren’t investing moguls. Often, it’s good to start with some well connected friends who run in the right circles. Like it or not, it’s who you know…
Think about getting in front of angel networks (syndicates). These are usually made up of ten or more angels and they write cheques between £100,000 to £500,000. It can be difficult to get an introduction to these networks, not least because they see a lot of deal flow. It helps to have a sparkling pitch deck so that when an angel lays eyes on it he/she can quickly understand your business and the potential, and feel greater confidence in the business proposition. In other words, be investor ready.
There are some operators in the market that can help you reach a vast network of investors, including Swoop where I am working, excuse the shameless plug. When it comes to Angels, it’s a numbers game but it also requires finding the right match for your business.
Make sure you make it easy for investors to take advantage of any tax breaks. In the UK, the vast majority of angels will invest under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). You should apply to HMRC for advanced assurance before you make any approaches to angels or VCs.
Popularised in the US, crowdfunding is a great way to get traction and publicity in the market while also raising funds for your business. Crowdfunding is big business and there are a number of players such as Seedrs and Crowdcube that can help you find investors.
Venture Capital (VC) Round
Some entrepreneurs see venture capital as the ‘holy grail’ of funding. For others, it signals the end of their control of the business. However you see it, there’s no denying that venture capital provides funding, guidance and a whole host of other benefits that can rocket your business from product-market fit to profitable growth!
There are many VC firms out there and it can be difficult to find out their investment strategy. Some entrepreneurs have the right connections, but if you don’t, you can spend a lot of time trying to meet VCs – this is time away from focusing on creating a viable business. Make an informed plan of you to contact and keep track of it! Alternatively, use a third party to help access a broad network (see above).
Here are some top tips before you reach out to VCs:
- Prepare a pitch (see angels section above).
- Understand your finances and be able to justify your unit economics and financial projections.
- Make sure you have product-market fit (i.e. your product satisfies a strong market demand.)
- Get EIS/SEIS advanced assurance (i.e. provisional indication from HMRC that you’ll be able to apply for tax relief for your VC investors).
- Get to know the VCs and choose wisely – when you accept an offer of investment you’re not looking just for money but rather a partnership that will shape your business for several years.
There we have it, the many ways to get your start-up funded if you’ve decided that equity finance suits your needs more than debt finance. None of these options are particularly accessible but you knew it wasn’t going to be easy!
To quote Tom Hanks (as Jimmy Duggan) in the 1992 movie A League of Their Own, “It’s supposed to be hard. If it were easy, everyone would do it”.