The market may be tougher than usual at the moment due to the economic drag from the coronavirus pandemic but you can still fundraise. But first ask yourself is it worth it? If so, follow these tips to give yourself the best chance of success.
John Spindler is the CEO of Capital Enterprise. John has had over 15 years’ experience as an entrepreneur and business advisor/consultant and as well as being responsible for the day to day management of Capital Enterprise is also a general partner at AI Seed, an early stage fund that invests in highly talented AI first companies.
Don’t raise if you don’t have to
Dr Chibeza Agley, Founder of Obrizum points out that his company survived for several months on revenue alone before seeking a Seed round. It was the realisation that revenue alone would not meet the company’s growth ambitions that sparked an interest in raising. And Obrizum was all the better for it – with reliable proof from existing metrics of the company’s profitability, it was easier at seed to convince investors they were worthwhile. Only 2-3% of small businesses ever seek external equity investment at all, and equally, very few businesses that achieve an IPO have done so; most tech businesses in the UK are service or project based businesses, and therefore not VC backable - but these are certainly still legitimate business models.
You do not need to raise if:
Your business model allows you to make revenue at a smaller scale
You are selling a service rather than a product
You can access some debt to grow the team and break-even
If you have no intention or means to give your investors a good return on their investment. Only 6% of seed-stage investment return capital so if there is no route to a big exit on their investment why should they bother?
Always look at alternate routes before seeking external funding
That being said, once you have looked at other options and concluded that
a) your business is of the type that really does need external funding to grow, and
b) you are the right type of growth focused startup that an investor can reasonably expect to make money from, then, don’t be shy of giving away equity.
As Vishal Chatrath, CEO of PROWLER.io points out, 100% of something small, is less than 10% of a company that can, within 5-10 years be sold for multiple millions. In addition, giving away shares can have the benefit of tying in advisors who can provide valuable experience and insight, and who would not otherwise have an incentive to offer their time. Both Chibeza and Vishal speak of prioritising taking investment from investors they trusted, and who they knew would give useful insight, over taking a larger amount from those who they knew would contribute less. This is what I and many others call ‘smart money’.
Always prioritise smart money - but in many cases even dumb money is often better than no money at all!
The chance of getting investment from an individual VC is only 4%
Having settled on investment as the only viable course of action to help your company scale, there is much to bear in mind when approaching investors - and there are many things you can do to massively increase your odds of success, and if not, make the whole process enjoyable. With help, you will find the fund-raising process a great way to learn more deeply about your own business, the market you operate in and what you might need to do to grow and prosper.
Here are my top tips for fundraising:
Be confident in you and yours team abilities, credibility and big advantages. Know why you and your team are the best people in the world to grow this business into a world leader and especially have a strong case why your team has what it takes to deliver on your keen milestones over the next 18 months. If investors (especially at seed stage) do not have confidence in your team’s ability to execute then they will not invest. So make sure you try to recruit key team members for all the key roles, key advisors, key commercial partners to your business prior to going out fundraising.
Be the smartest person in the room. Investors will interrogate you about your knowledge, key assumptions, verifiable facts and unique insights around your target customers’ needs, desires and unmet problems. Know your market, know your competitors inside out, know what is driving change in your target market that will create a new opportunity for a new player like yourself to make a big splash and in time become the big winner.
Create a strong narrative. You need a convincing story that gets a potential investor excited that you have discovered an amazingly large new market opportunity that you and your team are almost uniquely well placed to capture. The same compelling story needs to be able to be told in an elevator pitch, in a pitch deck, in a business plan, in a cross-examination with investors and in informal conversations.
Show don’t just tell. Investors will want to see evidence that you can build your solution and that your solution solves the problem for your target customers and compares well with competitor products/ alternative solutions. So be prepared to show a demo. a working prototype or even a best-in-class working solution, it is also best that you can demonstrate that you can sell your solution to your market (the infamous traction) and that you can also create a “buzz” in the market so that there is a waiting list or strong potential sales pipeline and that great talent and amazing commercial partners are lining up to join/ support your company. Pre-product, pre-pilot and pre-revenue companies will find it hard to raise. Trying to fundraise with a team that has yet to demonstrate they can build or sell and with an untested hypothesis that there may be a big market opportunity waiting to be seized is likely only to impress investors who already trust and love you- your family and friends (and the occasional fool).
Know your numbers. How are you going to make money, what is your business model, is your business model the same as competitors or better - and if so how and why. Have a good idea how much it will cost you to acquire customers, how much it will cost to serve customers, how your business model is repeatable, scalable and as it grows becomes more and more profitable. Know how much money you need to raise to hit your key milestones over the next 18 months, know when you can reach break-even and how much you are likely to need to get there and when, and do know how you expect investors to be able to make a return by investing in you now.
Research your investors. They are all different, with different motivations, different ways to assess and weight risk and different specialisms and ways not just to provide money but value. You may have to pitch everyone but if you can best to try to match your business case for investment with an investor that is most likely going to be sympathetic, interested and able to invest.
Get connected. Investors very rarely respond to cold calls and self-referrals. Find someone they trust, get them to buy into you and then ask them to make a warm introduction. Luckily for you Capital Enterprise is one of those trusted sources of deal-flow for pre-seed, seed and series A rounds for professional investors in the UK.