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This note comes from the Start Up Conversation 2.0 event on the 5th of July, organized by ThinkPLANK & DreamStake. 

1. Do you really need the money?

This is the first question any start up needs to ask itself. Do you really need the money? Ask it again. Don’t fall into the trap of thinking that you should start your business by going out to raise a big wad of capital. How far can you go without the external investment. Can you get a loan? Against your mortgage?Credit card? Have you explored all the other options first?

2. Why do you want to raise money? 

Do you have a very clear idea about why you need the money? If it is to pay yourself a salary, don’t. Just get a job instead. Explore very clearly your need for funds and be prepared to defend them against revenues and your business plan. 

3. The valley of death

The reality is, you will have to cross the valley of death – the time when entrepreneurial funds will run out and you won’t yet have revenues and possibly even a product. This is when you really need to be creative about funding. External investors will at this stage take an arm and a leg for your business. To address this, create a stripped down version – a minimum viable product which you can use to create interest, and if possible, some paying customers. 

4. Angels

Everybody knows about Angels, but not surprisingly, many entrepreneurs have no idea how to get to one. What you shouldn’t do is pay for this information or pay somebody just to introduce you to angels. There exist entities such as the BBAA (British Business Angels Association) and plenty of others you can reach out to. But perhaps more critically, you can network your way to the right angels. 

There are broadly two types ofAngels (thanks Michael) “financial angels” – high networth individuals who are looking to do something with their cash, and “industry angels” who are trying to create ecosystems within an industry that they understand and possibly have experience in. 

5. What about VCs? 

Obviously, this comes later, but there is plenty of crossovers between Angels and VCs. Keep the VC on your radar, but probably a much later discussion. VCs will give you money when a) you can establish that you don’t need it! and b) when they can clearly see a 5x-10x return in a defined timeframe. 

6. Incubators 

Fortunately, the European incubators are now coming to the party – now there are entities such as Oxygen, Seedcamp and StartUp Bootcamp - who are using the well publicised YCombinator and Techstars models to put entrepreneurs through a 2-3 month intensive session to sharpen the business and even provide some initial seed funding. 

7. Advisors 

Be wary of advisors who promise to get you “investor ready” for a fee. Instead go with those who are willing to work for a share of funds raised, on a no win no fee basis. Although there are some reputed ones run by well known accounting firms, and providers such as Clean Capital. 

8. Grants 

The great things about grants is thaat they are giveaways. Not loans or investments, the money is yours, subject to your meeting specific criteria, of course. The bad news is that they tend to be very arduous processes for getting them and can be a big drain on effort. Often they’re also quite competitive and might have specific requirements which don’t actually fit your business model. For example it was mentioned that some European grants require a university research collaboration and 3 companies from 3 different countries involved! On the other hand the TSB does some tech grants in the UK which are well known. 

9. Racheting 

Some investors will want to offer a racheting structure where the money will be available against specific milestones or a fixed amount of money will convert to more shares for the investor if the business misses its milestones. My basic discomfort with this model, is that it creates a conflict of interest as it is then partly in the investors interest for the business to miss the milestones, so that the investor can get a bigger share of the company. Doesn’t make sense to me. 

10. Convertible loans 

Convertible loans are often preferred by investors to protect their interest in the business and create a vehicle which has a higher security than a pure investment. The investor typically has the option to convert the loan into equity if certain milestones are not met. This also has the problem as above, but this is a good model for funds collected from friends and family. 

11. Crowdsourcing – Crowdcube

This is a brand new model, initiated by Crowdcube, which allows you to raise moneys through a crowdsourced model. Crowdcube have done all the hard work to ensure that it is compliant with FSA regulations (2 years on the drawing board!) to create a model whereby individuals can invest small amounts (from £10 upwards) into a business. This model works for small to medium size of funds – say between fifty to hundred thousand. But also, remember that Crowdcube is just the platform, you still have to do the hard work of working the crowd, your friends and family and driving people to the model. The beauty of this model is of course that it’s similar to doing a public offering. On the downside, it involves bringing a large number of investors on board so investor management can become a challenge very early in the life of the business. 

12. High networth individuals 

A useful tip is to search Linked In and your other networks for recently retired Chairmen or recently redundant senior executives, who typically will be looking for alternative careers and will typically have funds available, as well as a good network. These are people who might want to do something entrepreneurial but may not have a specific idea of their own, could be a great match for somebody with the idea but lacking resources. 

13 Invoice discounting 

An option available for growing companies is the invoice discounting offered by players such as Gener8 Finance. They will pay you against invoices raised, to ease cash flow challenges for growing companies. Generate charge a fixed monthly fee over and above a basic interest, while some others charge on a % of company revenue. The danger with the latter is that you pay a greater price for success. You can also explore factoring, which differs from invoice discounting in that in factoring, the provider participates in the collection process. In either case of course, the entry criteria is that you are generating invoices, which automatically means it applies to certain types of businesses and not others. Not an option for the garage start up looking to build a product. 

14. White labeling 

For some types of technology companies, it may well make sense to find a client at the early stages, give them a great deal and white label the product with them. This will enable you to build the early product using revenues from clients. It also has the benefit of actually registering revenues early in the game. However, the task of convincing somebody to buy/ whitelabel your service very early in the game may well be a tough sell. 

15. Mutual Selection

Whatever you end up doing, be aware that the investor-company relationship is a two way street and there should be selection on both sides. You should select the right investor for your business, depending on their funding strategy, expectation match, track record, exposure and expertise in your business, non financial help and network strength and overall comfort in the relationship, to name a few criteria. Some angel networks set up speed dating services. This might be a good start, but more than a few minutes might be required to establish a match. 

16. The Team

In all the discussion around funding, remember that most investors back the team, more than the idea. Don’t go out there as singleton looking for funds. Make sure you have your core team in place. Here are some thoughts on the core team, based on our previous conversation. 

17. Location/ relocation 

Should you be starting out in London? Or in Silicon Valley? If you’re a high-tech start up, the chances are significant parts of your ecosystem are in the Valley. And it is generally felt that angels and VCs in the Valley understand tech investment, many of them having been entrepreneurs in the past. Consider the ideal location for your start up, it could have a signficant bearin gon your funding. 

18. The business plan

Theres a reason why this is at the end. Nobody funds a business plan, but you have to have it and be prepared to defend it. In short, it’s a necessary but not sufficient aspect of the funding challenge. Most importantly this answers the first to points we spoke about and gives you the discipline and detail required to answer those questions both to yourself as well as your investor. 

Many thanks to Darren Westlake from Crowdcube, Joe Waters from Gener8 Finance and Michael Braga from Motiv Marketing 

Got more tips to share? Let us know! 

PS. The next Conversation 2.0 Event will be on the 2nd of August and we’ll be talking about “The First 200 Days”. See you there! 

 

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