Pretty much every SME owner accepts that raising funds is tough. In the current economic climate, although things are starting to look up and the seeds of recovery seem strong, sniffing out the funds you need to either scale up your existing business or fund your start-up from scratch can be a real challenge. The good news is that most business owners or start-up owners accept that. However, what many often forget is that chasing funding is a highly time-consuming and often costly business.
But why is this the case?
Here is the process that most start-ups or scale-ups need to go through in order to raise funding:
- Working out how much is needed
- Shopping around for possible funding options
- Creating an appealing pitch
- Following up
- Negotiating and closing the deal
On the face of it, these tasks seems straightforward enough, but when you add running a business into the equation, the time and money needed to do the fundraising job effectively can become a real burden.
And in my experience, the main external costs involved in fund-raising ie the accountancy, legal, IP, due diligence and angel syndicate fees are always underestimated. If these are not included into your funding requirements they can come back and sting you once the cash is in your bank. Another area which is often overlooked are the costs post investment. Costs such as investment monitoring fees and salaries for non-exec directors could soon ramp up post investment and in my opinion are often overlooked during the planning phases.
Working out how much you need
It’s a fundamental part of any funding process that you need to know how much you’re going to need, but working that out isn’t always a straightforward process. When it comes to putting a stake in the ground for your funding requirements, the figures need to stack up, but there’s no getting away from the fact that there needs to be some level of assumption in there. Seeking the help of an independent advisor, whether it’s a business advisor or an accountant will relieve the pain of this part of the process no-end because when you’ve done it a hundred times over, it gets much easier! So if you’re struggling with this part of your funding process, don’t put yourself through the mill by flying solo: ask for help.
Shopping around for possible funding options
Grants, banks, venture capitalists, business angels and even friends and family may well be on your list of possible options for providing the cash you need to get your start-up or your scale-up to where you want it to be. Either way, shopping around each of these options takes time and can be frustrating if it’s new to you. Once again, best advice is to get a seasoned advisor on hand to help clear the path for you. Someone who has a network of trusted sources of finance won’t only save you time, but may well be able to open doors for you that might otherwise stay firmly shut.
Creating an appealing pitch
You’d be forgiven for thinking that a borrowing pitch is a borrowing pitch; but you couldn’t be more wrong. Even within each of the different groups of potential lenders, different people have different priorities. Knowing what’s important to a potential source of funding will help you tailor your pitch accurately to their needs and motivations, in turn helping increase your chances of the ‘Yes’ vote that you so desperately need. It’s also worth bearing in mind that pitching may often involve travel. It’s for this reason that you should allow for travel and accommodation costs if you think you’re likely to end up running round the country (or even the globe) to meet up with potential investors. As Dr Stefan Raue of the event management app provider Bizvento explains, ‘Be aware at the outset, the time and financial commitment involved in raising investment and seeking public sector grant funding can be a full-time job. As a startup juggling investment raising and running a business is very difficult!’
Once you’ve pitched, you’d be foolish to think that investors will come running after you. Far from it – you’ll need to chase them. The power is in their hands and it’s up to you to stay close to them to make sure they don’t forget about you. Chasing up potential investors can be a hugely time-consuming and frustrating business, but is an essential part of nailing down the cash you need to advance.
Negotiating and closing the deal
Even when you have a proposal on the table, your work’s not done. It’s rare for any funding source to offer up the precise deal you’ve asked for first time around, so make sure that you set aside time in your planning process for re-negotiating and closing the deal. Dr Craig Robertson of Epipole, which is developing a monitoring and screening platform for diabetic retinopathy, would fully agree that you need plenty of time and patience at this stage of the investment process. Craig advises that ‘you need to know when to speak up and shut up’.
So, in summary, when you’re fund raising it’s essential to go in with your eyes wide open. Make it a priority to be realistic about the accountancy, legal, IP, due diligence and even administration fees that might be involved. Being aware of these costs and factoring them you’re your funding requirement ahead of the event means that you’ll be better equipped for the journey ahead. And don’t forget that funding costs won’t end when you’ve drawn down your first tranche of investment; thereafter you need to allow for post-investment fees such as monitoring and non-exec activities.
The bottom line is, in order to save yourself a whole lot of frustration, time and money, be as realistic as you can be for the actual costs involved in raising funds. That way, you’re sure to stay ahead of the game.
Kevin Lonergan is a commercialisation adviser at Alba Innovation Centre