Navigating the funding maze to raise finance
From angels to VCs – raising business finance is positioned as something anyone can do but in reality, it can be hugely confusing. Here Duncan Di Biase, co-founder of investment consultancy Raising Partners, outlines the main channels available to help entrepreneurs choose the right route for them…
There are many funding routes open to businesses, from the traditional venture capitalists (VCs) to the newer crowdfunding platforms. Each has its own benefits so it’s important that entrepreneurs research the options available and choose the right one for their business.
Before you get started, firstly make sure you know where you want to go with your business and consider whether now is the right time to raise finance – your investors will want to know about your traction, revenue, path to profitability and valuation. If you can’t provide the answers they’re looking for, it may be that you’re not ready yet and need some more time.
Here’s a breakdown of the main funding routes to consider:
1/ Your own contacts
Friends, family, former work colleagues – it may sound a bit ‘unofficial’ but for many people this is a sensible first step when starting out.
• Those closest to you are likely to give you truly honest opinions, especially if you are asking for funds. If you’re successful, it’s a good sign that your business is investable. • Approaching friends and family is a great training ground for your later approach to professional investors. They may not be business gurus, but they are likely to ask some of the questions investors will also be interested in.
Crowdfunding is a newer entry to the world of raising investment. It allows the general public and investors to invest in businesses on a public platform. There are a number of crowdfunding platforms, the most well-known in the UK being Crowdcube and Seedrs.
• If your business is consumer-facing, crowdfunding is a great way to gather future loyal customers. Consumers who invest in a business feel far more engaged in its success and are more likely to choose your products or services over a competitor. • Allowing the public to invest directly in your business helps to humanise your brand. Consumers now expect businesses to be transparent and to give something back. • It’s good PR, especially if you exceed your target or achieve it in a record time. This communicates to key stakeholders the relevance and value of your business offer.
3/ Angel investors
Angel investors are usually wealthy individuals who provide equity to start-ups and entrepreneurs in exchange for a share of ownership in the fledgling company.
• They consider more risky propositions. Angel investors are willing to take a punt on riskier business models as their start-up investments typically account for only 10% of their investment portfolio. This means they are not put off by organisations with riskier business models or operating in more volatile sectors. • Return is not their sole focus. Angel investors are generally more interested in the entrepreneur and involving themselves in helping to drive the early stages of a business. • Angel investors often have great connections with other angels with a lot of angel investors following each other’s investments. We have seen this lead to multiple angels being brought into a round, matching the initial amount invested by a first angel.
4/ Venture Capitalists
VCs invest in businesses which have the potential to grow rapidly and can earn them and their clients big returns. They are more institutional than angels and usually invest on behalf of others.
• VCs are often looked up to by angel investors. Having a VC back your company can encourage other investors to come in as they will have conducted in depth due diligence on your business, ensuring what you have pitched to them is actually true. • A lot of VCs have large networks they can call upon to support the growth of your business, from talent pools of people you could hire, to making strategic introductions to other businesses they have backed to mutually benefit both of you.
5/ Debt Finance
Debt finance can provide a significant and quick cash injection for your business, if you have a good financial record, in the form of a loan. It is important to review the interest associated with this form of raising as it could be significant when compared to an equity raise. However, with the rise of peer to peer lending, debt financing your business could get you in a position to raise your first round of equity finance. Achieving initial finance puts you in a very strong position as you will have the traction and revenue to command a valuation that won’t dilute your shareholding by too much, protecting you for future equity rounds.
• Receiving debt finance is a relatively speedy way to secure a cash injection for your business. • A loan cash injection could enable you to hit some quick growth metrics, prove your traction and the need for your business in the market. This could increase your company valuation as a result.
You probably now have an idea of which route you want to go down but it’s important to remain open to all types of investment. In reality when you raise, it’s likely that your round will be made up of multiple sources eg: an angel network, angels or VC. If you have a lot of investors and a large customer base you could combine these using a crowdfunding platform.
Whichever path you end up taking, you will probably have setbacks but don’t be disheartened. For most entrepreneurs the path to success is not smooth but it is hugely rewarding. Attracting funding takes patience and persistence – and don’t be afraid to ask for help if you need it.