Great business plan? Check. Shiny elevator pitch? Check. Investor meeting? Check. What's next you might be asking? Turns out it’s a very good question.
All Venture Capital-backed entrepreneurs will tell you that fundraising involves a steep learning curve, requires resilience and lots of work. It is unfortunately a large business distraction and can occupy your life for the best part of six months. Being prepared both mentally and administratively is key to success.
After speaking to numerous entrepreneurs we’ve recently backed, here’s what we think you need to know, broken down into various themes.
1. Preparing your Mind
1.1 Talk to your significant other or business partner
No doubt about it, your personal life will be impacted. There will be more work than time so you may have to get up with the birds or burn the midnight oil to get it all done. Some avenues will lead nowhere which will likely be very frustrating. It will have an effect mentally and emotionally so you need strong support at home.
1.2 Be ready to part with equity and some control
Investors back teams, not individuals. If you don’t already have a team, you’ll need to put in a 20%+ option pool. That equity will come from you so your 100% quickly becomes 80%.
When you raise a funding round, you will likely be diluted 30%. So 30% of your 80% equity stake will take you down to 56%. This may seem somewhat unappetising but you need to ask yourself which is greater - 100% of an ant or 56% of an elephant?
Remember, you are selling equity that investors are buying with cash. A fair exchange of value, with the buyer receiving equity funds. Try not to say “we’re giving away x amount of equity,” as that often sends the wrong message.
Institutional investors will almost always take consent rights over your business. What does this mean? It means they want to be able to prevent you from doing things that may erode shareholder value, like buying a Ferrari on the company credit card… If you want external investment you’ll need to get comfortable with not being the sole decision maker. To contextualise it, remember that the day you take investment is the day you agree to sell your business, so try not to be too possessive over the asset you are selling.
1.3 Find a co-founder
Co-founders are great for a variety of reasons. At this stage of the game, they really will ease the pressure. As mentioned, fundraising will take up most of your time, so who will be running the business in the meantime?
Where can you find a co-founder? It’s probably not a good idea to look through your latest WhatsApp chats and pick the first under-employed friend on the list. If the business goes under you don’t want to lose both your friends and your business. Go to start-up events, find like-minded entrepreneurs who bring passion, vision and a complementary skillset. Your friends are probably quite a lot like you. Find someone who will challenge your way of thinking. Different is good. You can also find potential co-founders at networking events, conferences, at your place of work or even online.
1.4 Figure out what you want from a potential investor
Not all investors are created equally. Some bring money, some bring knowledge, money and contacts, and many say they bring everything but often don’t. You need to think about exactly what you want. How much capital from how many individual investors? Do you want them on your Board? How operationally involved do you want them to be? Are you looking for sector-specific investors with industry contacts?
The above process is useful for targeting investors. There’s a big investor-base out there and you cannot possibly contact everyone so focus your efforts on the ones that have what you need. There are all sorts of investors to choose from, including personal investors, angel investors, venture capitalists, corporate investors, banks/financial institutes, and incubators/accelerators.
2.1 Clear your diary
You’re going to meet a lot of people in various part of the country. If an investor is ‘hot’ and ready to press the button, the last thing you want to do is stall and risk them walking away.
Fundraising is literally a full-time job and akin to Management Consulting in terms of career choice. Most people we speak to say it’s the hardest they’ve ever worked. It’s a good idea to make it as easy as possible by removing all other distractions.
2.2 Plan your first exit
The moment you’ve been waiting for. Quitting your day job and bringing you one step closing to becoming your own boss. When investors put money into a business, they become your partners. They will marry you to the business in the form of a Service Agreement that essentially says you will devote all of your time to ensuring your start-up venture is a success. So (un)fortunately you will have to deliver some tough news to your existing boss. Timing is everything so make sure you have a robust exit strategy to ensure you don’t put too much financial burden on yourself.
Remember that CVs are even important to VCs and usually form a key piece of management due diligence. So make sure it’s up to date and you’ve done right by your employers.
3. Commercial Items (things you can do yourself)
3.1 Register your business
Things are starting to get real. It’s time to look like the proper company that you are. Register the business on Companies House and set yourself up as a director. Remember, directors have fiduciary responsibilities so make sure you keep a clean slate and follow the letter of the law. This is you officially becoming your own boss
3.2 Get desk space / a registered office
You probably don’t want your home address plastered all over Companies House for the world to see so it’s worth using a serviced office instead. A central business district (CBD) address will also signal that you’re a proper company. There are various online agencies that will help you set this up for very little cost.
By all means keep costs low and work out of your bedroom for now but once you receive investment, your investors will want to come and visit so it’s worth getting a desk in a co-working or incubator hub. Also, working in isolation is usually not much fun so get out there and start enjoying the benefits of working in a start-up.
3.3 Get paying customers / gaining traction
You need more than a hunch that someone is willing to buy your product or service. Yes, some Angels will invest pre-revenue but one thing for sure is that your valuation will be reflective of this. Add value to your proposition by getting out there and selling your product before you sell equity.
3.4 Get into sales mode
As above, you need to sell your idea to your co-founders to get them on board, to your customers to get them to buy, and to investors to get them to part with their money. You will be a smooth-talking sales machine by the end of the process so you might as well get a head start.
3.5 Appoint a solicitor and accountant
You’re new to this fundraising thing. Solicitors and accountants do it for a living. Yes, you will incur fees but the advice usually saves you lots in the long run so it’s worth it. You will soon find out that there are fees throughout the investment process so it’s good to start wrapping your head around them now.
3.6 Form a Board and find a Chairperson
Not only does this make you more investable but it is also a big driver of value. In order to build a world-class business, you need a strong board who will challenge you. Non-executive directors help tremendously with high-level strategy and provide essential direction that you may not initially see because you’re stuck working at the coal-face.
You’re also going to need a Chairperson. If you put this off, you’re likely going to have some tough conversations with potential investors. It’s always good to have a Chairperson to act as a gentle buffer between you and investors to ensure your long-term relationship isn’t unnecessarily strained at this early stage.
3.7 Figure out what insurances you need
At a minimum you will need Employer’s Liability and “keyman” insurance. Cover usually needs to be twice the value of your annual salary but check with your investors.
It’s often good to have insurances for Professional Indemnity, Public and Products Liability and Legal Protection.
Ideally you should have insurances that protect against company-specific risk such as Premises and Inventory insurance for a manufacturing business.
You don’t need to pay for the insurances until the last minute. Just use the time to line up all the quotes so it’s just a simple push of a button.
3.8 Clean up your bank accounts
In the early stages it’s not uncommon for there to be a blurry line between your personal and business bank account. Investors will want at least six months’ worth of bank statements. Make sure you don’t give them any reason to be alarmed.
If you’re currently using a tech start-up challenger bank, then ask yourself whether it will meet the needs of the business going forward. Some only allow you to earn annual revenue of £1 million. If your pitch deck says £2 million revenue by year three then when are you going to change your account? Start right.
4. Technical Items (things you might need help with)
Is it coherent and plausible? Investors will heavily scrutinise every detail. Have you done your homework and provided full disclosure? Do you know who all of your competitors are? Don’t let investors find out before you or you’ll lose their trust and probably the whole investment. As a colleague of mine once said: “surprises are for birthdays, not the outcome of a due diligence exercise.”
Remember that as part of the legal process of investment, you will be expected to provide warranties that all information you have supplied is true and accurate to the best of your knowledge. If you’ve ‘flown a bit too close to the wind’ you expose yourself to personal financial liability. Don’t risk it.
Who to ask: Incubators / Corporate Financiers
4.2 Build a robust financial model
Besides the actual company, this is possibly one of the most important items to investors. A robust financial model shows that you understand the mechanics of the business and what ‘levers’ need to be pulled to generate profits. Show how you will spend the money you get. How long will it last? What is the best case scenario? What is the worst?
Remember that if you need a follow-on round (true for 98% of start-ups) then at that point investors will heavily scrutinise how well you performed against the original plan. As we’ve said before in our ‘What do investors look for in a tech start-up?’ blog, hockey-stick projections may seem like a good idea until the point that you need to deliver them. Keep it real.
Also, know your numbers well. Ever watched a Dragons Den episode where the entrepreneur doesn’t know what their gross profit margin is? They always get a scorching.
Who to ask: Corporate Financiers
4.3 Produce a good set of management accounts
Any investor worth their salt will not put money into a business until they have up to date accounts. Imagine, a £200k liability on the Balance Sheet (called Statement of Financial Position these days…) and an investor puts £250k into the business on day 1. Day 2, you pay off your debt and the company is left with £50k. Imagine…
Who to ask: Your Accountants
4.4 Put your product through the mill
Is it truly investable? Do you have the courage to present it in front of 5 “dragons”? If you pass this first hurdle, your product will be subject to a technical due diligence. Is there anything you aren’t proud of?
How do you know you have an MVP (Minimum Viable Product) if 100 people haven’t tried it and given you feedback? Get your product in front of as many people as possible and take all criticism on the chin. It will make your offering better and ensure you’re ready to confidently answer any questions investors throw at you.
Who to ask: Anyone with experience and an opinion
4.5 Get your Cap Table in order
Investors will expect you to provide them with your existing capitalisation table. Remember that £10k investment from Dad? It all needs to be on there so that there’s a definitive starting point. ‘Owning’ the cap table also means that you can model out different scenarios with regards to the dilution you will incur from your option pool and the investment round.
Who to ask: Your Chairman / Corporate Financier
If you’re a University spinout then you’ll likely need to strike a deal with the University to get the IP rights assigned to your company. Similarly, any patents, designs, copyrights and trademarks registered in your name should be transferred into your company. Investors will require full transfer before any money changes bank accounts so you might as well get started early.
Who to ask: Your Solicitors
By now you’re probably starting to realise that this whole investment thing takes a bit longer than an episode of Dragons Den to secure. It can be challenging but also rewarding. As one of our recent investee entrepreneurs recently so eloquently said it, “you’re more refined as a human after fundraising.”
Remember that external equity fundraising is only one of many potential options for your start-up. If you decide it is a good option for you then make sure you’re well prepared and willing to see the process through. If that’s you and you would like to be considered for funding from the TVI team at the Development Bank of Wales, please get in touch.