You’ve got a great idea for your new business. Only you need some money to get it going. The first port of call for any entrepreneur is usually friends and family. However, what if you’ve exhausted family connections, what then? When it comes to raising start-up capital, who can you turn to?
At this point, there are various options: you can try angel investors – usually businesspeople who have experience of your sector but who will want a share of your business. Or you could go down the crowdfunding route through Crowdcube or Seedrs, which can be time consuming and complicated. If you’re really ambitious, you could try a seed funding round – but where do you find investors and how should you approach them?
>See also: Small business finance – the complete guide
Raising start-up capital can be intimidating and overwhelming. Thankfully, help is at hand. These advisors below are not financiers per se but will mentor you to get your business plan, fundraising documents and legals into the best possible shape before you pitch to investors. They are there to hold your hand through every step of raising start-up capital.
As the saying goes, fail to prepare and you prepare to fail.
Funding Game
Funding Game offers either group workshops or one-on-one coaching for raising start-up capital. Founder Paul Grant is a former business owner himself who launched Funding Game 15 years ago to mentor entrepreneurs. Clients that have raised start-up capital through Funding Game include call centre software provider Trustportal, online stationary store Martha Brook and home cooking curry brand BANG! Curry.
Says Grant: “I realised that entrepreneurs didn’t know about how to go about raising start-up capital. I knew I could guide them and help them. My mission was to demystify the experience of entrepreneurs and boil it down to simple steps.”
What Funding Game offers
Funding Game helps start-up founders with raising start-up capital in the following areas:
- Angel investors
- Small VC capital
- Crowdfunding campaigns
It delivers this mentorship through:
- Workshops in partnership with British Library
- Online events
– How to create a pitch deck
– How to value your business
– How to create a financial model
- Group coaching
- One-to-one mentorship
- Weekly webinars
Funding Game usually only mentors around 15 companies at any one time, so contact Grant first about availability.
You pay Grant a monthly retainer for coaching plus, in the case of a crowdfunding campaign (he has successfully completed 50), a percentage of funds raised.
>See also: Alternative business funding for small businesses
Grant said: “The ultimate idea is to help you get funded. Not just get funded but with the right investors and the right valuations.”
Some clients have stayed with Funding Game for five years because it’s rare they have just one round of investment. Raising start-up capital can be an ongoing process. Bang! Curry, for example, is preparing for an angel investment round having raised £360,000 through two crowdfunding campaigns on Crowdcube in tandem with Funding Game.
Common problems raising start-up capital
Going for VC money too early
Grant says that many founders approach him to early. They assume that they immediately want to raise VC funding, which typically only invests in rounds of £1m upwards.
Unrealistic valuation
Or they have an inflated view of their own company valuations, having read about sky-high valuations of red-hot US tech start-ups. Part of Grant’s job is to bring them back down to earth with more modest expectations.
Overcomplicated business plan
Another common misconception when raising start-up capital is that founders think they need to write a full business plan. What investors really want is a clear-cut pitch deck with a dozen slides and a one-page summary.
“Nobody’s going to read your longform business plan,” says Grant. “Investors don’t have time.
“The art of a compelling pitch is to boil down your business into as few words as possible with an emotive angle to it, grabbing the investors’ attention. That’s not easy.”
What Funding Game looks for
What Grant looks for when taking on a client is at least some market traction or proof of concept in terms of sales. Your start-up must also be able to demonstrate scalable, 10x investment opportunity, solving a problem for a big market. “Anything that can help me create a compelling offer to get angel investors or crowdfunding,” he explains.
Most importantly, says Grant, is that he only wants to work with clients who are fun and easy to work with.
DropJaw Ventures
DropJaw Ventures is an award-winning business advisory service that also invests its own equity in start-ups raising capital or arranges borrowing.
To date it has helped 25 businesses raising start-up capital, securing over £30m in equity and debt for growth.
It also invests up to £250,000 of its own money as equity and arranges funding in total rounds of £250,000 to £3m per deal.
Co-investors include either institutional money, wealthy individuals or social impact funds
Investing own cash or alongside institutional or social impact funds including Northern Powerhouse Investment Fund, UKSE, FW Capital and Development Bank of Wales.
Chester-based DropJaw Ventures only takes on two or three new clients per year, mainly in the B2B technology space as that’s the background of founder Roy Shelton, who used to work for tech firms BT, Nortel Networks and CompuServe back in the day.
Shelton browses anything between 24 and 40 business proposals each before deciding who to invest in.
Investments to date include IT services provider Connectus, digital transformation consultancy Urban Tech Group, communications provider Guerilla ICT and edtech innovator GLUU. Previous portfolio companies have been sold to MySpace and Condé Nast.
It is currently invested in five companies.
What DropJaw Ventures looks for
DropJaw Ventures is interested in digital companies in the B2B space but also some social purpose start-ups such Spartan Survival, which offers survival skill training to people with behavioural problems, as he believes being able to demonstrate ESG policies are going to become increasingly important for companies.
Shelton says: “We’ve tended to shy away from B2C but we focus typically on technology and white-collar B2B businesses.”
Many start-up funds want to see one or two years of traction, says Shelton. They want to see a market viable product (MVP) already. DropJaw Ventures likes to get involved earlier, advising younger entrepreneurs about how to build that MVP. Bringing in an advisor such as DropJaw, says Shelton, means you get buy-in from an early stage.
Adds Shelton: “We’ve always get involved in our businesses. There’s two types of money – dumb money and smart money. Dumb money is passive investment when investors put money in but do little to add value. We’re smart money working with entrepreneurs to grow the enterprise value of their business to reach an exit.”
Yes, money is one of the ingredients you need for success, says Shelton, but it’s also about vision, drive and the commitment to see things through.
“What we want to see is an idea that’s solving a problem, not a business looking for a problem to solve. If you’re raising start-up capital, we can provide what’s needed, whether it’s debt or equity. And we can provide the advice that without doubt you’re going to need when you start to scale.”
SeedLegals
SeedLegals is a service for founders and start-ups that handles legals on fundraising. Over 35,000 founders currently use SeedLegals, thousands of which have also used the platform to help raise over £1bn of investment.
In particular, it offers a SeedFAST service which helps entrepreneurs raising pre-revenue start-up capital to structure agreements with individual investors. The investor agrees to discounted shares once the business has closed a funding round in exchange for their investment.
In America these are called of a Simple Agreement for Future Equity (SAFE) and have proved “wildly popular” according to Seedlegals founder and CEO Anthony Rose.
Rose, who led the team behind BBC iPlayer, co-founded SeedLegals in 2017 to help founders struggling with costly legal fees when raising seed investment.
First, he has a dim view of entrepreneurs who engage advisors when raising start-up capital. Yes, they can help you hone your pitch deck and investment proposal, but really it should be you who goes out and raises investment. VCs especially look down on entrepreneurs who outsource raising start-up capital.
Rose says: “If you hire an advisor, they want a retainer plus 6 per cent of the funds you raise as a success fee.”
The service SeedLegals offers is a response to how seed investment has changed.
Rose says: “Once upon a time there was no such thing as VCs or equity funding. All you could do was go to the bank, but a bank would never lend money because you were a start-up and you could not yet repay the loan, so the risk was too great.”
He is lukewarm about crowdfunding, which, he says may be good for products which people understand such as beer or cosmetics, but hopeless for start-ups in AI or deep tech – sectors which the public doesn’t understand.
Says Rose: “Crowdfunding – raising money through hundreds of tiny investors writing small cheques – only works if you have an entrepreneur who works the crowd. Plus you still need to find 30-50 per cent of your investment yourself to make your crowdfunding round pop.”
Entrepreneurs often hold out for venture capital investment.
The reality, he says, is that venture capital only invests when a company has revenue of over £1m a year.
“If you’re below that, VCs always want to keep you warm because they never know if it’ll be a breakout. But they pick companies that can succeed because they are already revenue generating.”
Too often founders value their pre-revenue businesses, at this stage nothing more than a pitch deck, at a multiple of what it would cost to run their start-up for 18 months with their dream team, whether that’s made up of software engineers or sales and marketing.
How to go about raising start-up capital
First, what you should do is create a one-minute pitch deck or a video introduction to your business and then “be shameless” about posting it on social media, such as LinkedIn, to attract angel investors, says Rose.
“The old way of thinking was that you’d come up with what you thought was the perfect pitch deck and then you’d pitch it to a VC, and they’d say, come back when you’re ready.”
The new way, says Rose, is coming up with a pitch deck and posting it on social media and getting feedback.
“You would be amazed by the number of people who contact you,” he says. “The more noise you can make, the better.”
Using social media can be a cross between fundraising and market research, making your start-up more of an investible proposition.
“The good news about shamelessly promoting yourself on social media is that it’s free. It’s only by spreading the message and getting feedback do you understand what your customers want. The presence that you get will help you hone the pitch deck and work out if it’s investible.
“You want to be as visible as possible. Everything in a start-up is about creating a minimum viable proposition and getting feedback.”
At the same time, you should seek advance assurance from the taxman that your business would qualify for either SEIS or EIS investment – which offers angel investors a 30 per cent tax break when investing in a risky start-up.
Once you have found some seed investment from either friends and family or individual investors, that is when you can create a SeedFAST agreement, offering investors discounted shares in your company when you raise money, preferably through SEIS or EIS.
Mismatched valuations
SeedLegal’s data shows that companies sell 15 per cent of their equity in a seed fundraise. The standard pre-revenue market valuation is 5x what you need to raise. So you would have to raise £3.5m at a pre-money valuation when you really you need £700,000 for 18 months.
Most investors would pour cold water on that and only offer you less than a million at best.
Rose says: “When people realise the mismatch between the valuation and what you’ve actually built, I think it’s much better to take a series of smaller steps to get there.”
The central message that Rose wants to get across is that founders raising start-up capital have grandiose ideas of how much money they need to get up and running. Far better, he says, to start small and use what money you have when raising start-up capital as proof of concept and iterate from there.
Further reading
