This is totally understandable as founders have typically established their business using skills or knowledge relevant to their particular product or service, and finance is just one of the very necessary areas that is required to bring their business to life.
However, funding or, more precisely, the lack of funding, is one of the most crucial aspects of any business. It is not unexpected then that I overhear so many questions that are focused in one way or another around this topic. Whilst the precise questions vary, they are typically about when, where, and how they should be looking to raise finance and what is the best way of doing it.
As regular readers will know, there is not normally a fixed answer to any question, as the best answer will always depend upon the exact circumstances of the business. In this case the answer should be shaped around all of the following circumstances:
This is a topic that I have written a lot about and various articles can be found on my page at Startups Magazine and on the www.boomandpartners.co.uk website. Essentially, raising equity can be split into four groups. The first group is friends and family, and this is very often the first port of call for founders looking to raise initial funding after their own resources start to run out. These ‘investors’ often invest as much with their heart as they do with their head as they want to support you. But after that there are three typical routes and which of these is best for you as a founder, and the business going forward, will depend on the answers to the questions above.
One route is angel investors or high net worth individuals where a small number of wealthy individuals are persuaded to invest into your business. If you know of some such people this can prove to be a relatively quick process as they might be encouraged to invest partly because they know you, although they would still do much more due diligence than friends and family. However, finding unknown angels can be a case of kissing many frogs and this can be done on a one to one basis or in dragons den type scenarios through angel networks. This can take much time, and having a few relatively large minority shareholders can be difficult, although one advantage is that they can be ‘smart’ money and bring knowledge and contacts as well as investment.
Another route often taken is that of crowdfunding. This can be a simpler procedure but do not underestimate the amount of time and effort required. Often this route can provide the best valuation for your business, but it is very important not to over value or to over promise and under deliver. Crowdfunding works best for B2C business that normal small investors can relate to. One major benefit is that no individual investor has, or feel they have, any particular influence over the company – just make sure you go for the nominee shareholder structure.
The fourth option is getting funding from a venture capital firm. VCs tend to be focussed more on round A or B rather than seed funding as they prefer to invest larger amounts of money. However, more and more VCs are looking at investing smaller amounts in earlier stage businesses. The downside of a VC as an investor is that they will normally negotiate harder which will result in a lower valuation, but the upside is that once they do invest they would normally look to invest in any follow up rounds.
Funding is a complicated topic and is never going to be covered in an 800 word article, or even a 1,500 word article, so the best action is always not just to ask others in startups but also to ask your mentors, advisors and contacts. Only in that way will you as a founder start to understand the options for funding and who best to work with to find the best way forward for you and your business.
in British English