With Forbes research showing that 90% of startups fail and 25% of them do so within their first year, it’s worth putting time, effort and some expense into achieving the right investment for your business. Need some help demystifying the process? Read ahead for key facts and top tips.
Time is of the essence
As much as you’re keen to get things off the ground, funding your business correctly is pivotal and requires your time and attention. Funding can take several months to secure, especially when you factor in human elements like availability of both parties, holidays and potentially lengthy decision-making processes. It goes without saying that legal aspects like constraints and due diligence can also eat up time, so in the short term, you must ensure your business can stay afloat whilst you secure funding.
The timing of your investment process is also something you need to choose wisely – consider at which stage of development your business will be ready to find funding. If you are at the idea stage, your business valuation will be much lower than if you have a prototype or proven revenue. If you do have those things, you are still likely to have to give away more equity in your business to achieve the types of funding given to more developed businesses.
Do your homework
Your idea could be an absolute corker, but how you let everyone know that – and the research behind how it will work – will have a significant impact on your funding. Firstly, you should conduct market research, covering:
After researching, you should be able to define yourself against the things you’ve learnt. At this point, it’s time to sit down and write that all-important business plan. If you haven’t written one before, it’s best to seek advice from someone who has, even if that means spending a bit of money. A business plan is a huge part of the first impression investors get of you and your plans, and giving them the best understanding possible increases the likelihood of investment. For starters, your business plan should include:
Ask for the right amount of funding
Whilst it’s tempting to just ask for the maximum amount you can get when you’re pitching, that might not lead to the investment you really need. You should take time to know your budget – research and carefully calculate how much it’s going to be and what you’re going to use it for, and make sure you share all the details with your potential investors.
It’s also advisable not to ask for too little. Investors will be wary, worried that they might not receive a return on an investment that is too small. You could also come off as unrealistic or poor at working out the costs you’ll need.
Try to factor in every element. Research by The Company Warehouse has found that 90% of new businesses don’t budget for online marketing costs, and it’s these things that can trip you up further down the line.
Choose the correct type of financing for your business
There are, to say the least, quite a few different finance options available to you – which is good news, as there will definitely be one to suit you and your business. Working out which one is right for you is an important exercise, and will help you to generate what you need whilst balancing the equity you own. Here are some options to get you started:
Bank loan – A traditional, very secure funding method. You won’t need to give away any of the equity in your business, but because of this, banks can be more restrictive in how much they lend to minimise their potential loss.
Personal/friend and family funds
A credit card
Home equity release scheme
Product pre-sales – Start pre-selling your tech to see if a proven track record in trading helps to add value to your business and thus increase funding/decrease the amount you require.
Crowdfunding – Use online platforms to pitch to a global audience. For pre-revenue businesses, a reward-based crowdfunding campaign (where you entice stakeholders to invest in return for future perks) is best. For those with proven short-term trading, equity-based crowdfunding will be suitable. If you have been trading for more than two years, a peer-to-peer loan may help your business grow fastest.
Sponsorship – As a startup, you won’t be able to start sponsoring global events, but a local sports team or tech hub event with common values might win you more support and provide you with funds.
Angel investors – Although angel investors will take equity, they may also be more willing to take a risk and invest a larger sum because they will have some control in the business. Angel investors can also bring experience, expertise and networking contacts. If you’re interested, try AngelList or The Yorkshire Association of Business Angels.
Incubators/accelerators – These can be very competitive, and you will need to show strong ideas, a high quality presentation and positive team dynamics. The main accelerators in the UK are Seedcamp, Springboard and Oxygen. Smaller accelerators are more accessible and offer seed investment of around £15,000 – £20,000 in return for equity in your business.
Make the most of grants, regional initiatives and government funding
To help you make up the funding you need – or if you’re in need of overall support – you can seek out government funding, grants or other kinds of financial support. It’s well worth finding out what you might be entitled to for free or for a very small cost. Another benefit of this type of funding is that it helps you retain equity in your business. In Leeds, the AD:VENTURE Leeds City Region programme provides funding, workshops and more to tech startups at a variety of stages.
There are other regional and local options that can help reduce the amount of funding you’ll need to bring in, such as discounted office space, mentoring and support for research and development. The University of Leeds’s Nexus Campus will look to provide this, as well as the Start and Grow programme from the LEP.
Using your people skills: pitching and networking
Pitching and pitching well is a skill you’ll need to perfect when you’re seeking out funding. You should aim for a well-delivered and punchy pitch which is a maximum of 10 minutes long. Be passionate and enthusiastic but focus strongly on your idea, your credibility and on the uniqueness of your product, as well as how it will make money. An accomplished pitch cannot be underestimated, so if you’re feeling nervous, it will be worth your while to seek coaching in pitching techniques and confidence-building.
The best way to find investors may be to network. Cold-calling investors with your business idea is unlikely to work – building relationships with people in your industry and community has a much higher success rate. Make sure that you network selectively, so that you focus on the events that attract people you’re most likely to benefit from. Gaining the trust and support of key existing and new stakeholders is important in surviving as a business long term.
Prepare when approaching investors and Venture Capital Trusts
Approaching investors and Venture Capital Trusts (VCTs) can be a minefield, so ensure you have a clear strategy before you start. If you’re making contact with a VCT, thorough research beforehand is a must. VCTs have criteria they apply to investments, and if you don’t meet all of the criteria, they will not invest, however good your proposal. Find out which VCTs are suitable for tech startups, and think carefully about the type of investor you would like and what they would ideally bring to your business. If you’re not sure about the investor of your choice, speak with the other businesses they are involved with to get inside knowledge on how they operate.
Have a clear vision in your head of what your limits are, but remember to approach investors with a degree of flexibility and compromise where you can. Decide which offers that might be made would be acceptable and which would not, so you’re not caught off guard when the time comes.
You could hire an advisor to help you approach investors and VCTs, but this can be costly and doesn’t take into account the legal costs that you will need to pay if a deal is struck further down the line. If you are early in your journey as a startup, approaching investors on your own with a short executive pitch and the right criteria may be best for your business’s finances.
Image by Unsplash. Provided by Harper James