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 center software provider Trustportal, online stationery store Martha Brook and home cooking curry brand BANG! Curry.
Says Grant: “I realized 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 goal is to assist you in acquiring funding. Not just get funding, but with the appropriate investors and values.”
Some customers have remained with Funding Game for five years since it is uncommon for them to have just one investment round. Capital formation may be a continual activity. Bang! Curry, for instance, is preparing for an angel financing round after raising £360,000 through two crowdfunding campaigns on Crowdcube and Funding Game in tandem.
Common difficulties in obtaining startup finance
Prematurely seeking venture capital funding
According to Grant, many startups contact him too soon. Companies presume that they need capital money quickly, which is normally only invested in rounds of £1 million or more.
Unrealistic appraisal
Or they have an exaggerated perception of the value of their own companies, having heard about the sky-high values of hot US tech startups. Grant’s responsibilities include bringing them down to earth with more realistic expectations.
Unnecessarily complex business strategy
Founders’ belief that they must compose a comprehensive business plan is a typical misperception while obtaining startup finance. Investors want a concise, twelve-slide presentation deck with a one-page executive summary.
Grant states, “No one will read your lengthy business plan.” “Investors are pressed for time.
“The key of a persuasive pitch is to condense your company into as few words as possible with an emotional perspective, capturing investors’ attention. That is not simple.”
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 Capita,l 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 IC,T 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 is seeking.
DropJaw Ventures is interested in digital companies in the B2B space, as well as social purpose startups such as Spartan Survival, which provides survival skill training for people with behavioral issues because he believes that the ability to demonstrate ESG policies will become increasingly important for businesses.
Shelton states, “We prefer to avoid B2C enterprises in favor of technology and white-collar B2B companies.”
According to Shelton, many startup funders want one to two years of traction. They want to see a minimum viable product (MVP) immediately. DropJaw Ventures like to get engaged early, helping younger entrepreneurs on how to construct the minimum viable product. According to Shelton, bringing in an adviser such as DropJaw ensures buy-in from the beginning.
Shelton adds, “We’ve always been active in our enterprises.” There are two forms of money: foolish money and intelligent money. Passive investment is referred to as “dumb money” when investors invest money but do nothing to contribute value. We help entrepreneurs increase their firm’s enterprise value in preparation for an exit.
Yes, according to Shelton, money is one of the necessary components for success, but you also need vision, desire, and the determination to see things through.
“We’re looking for a concept that solves a problem, not a company in search of an issue to solve. We can give either financing or stock if you are attempting to raise funding for a startup. And we can supply the counsel you will undoubtedly need when you begin to scale.”
SeedLegals
SeedLegals is a service that covers the legal aspects of financing for founders and startups. Currently, over 35,000 entrepreneurs utilize SeedLegals, and thousands of them have used the platform to obtain over £1 billion in funding.
In particular, it provides the SeedFAST service, which assists entrepreneurs in structuring agreements with individual investors when obtaining pre-revenue startup money. In return for their money, the investor promises to get discounted shares after the firm has finished a fundraising round.
In the United States, they are known as a Simple Agreement for Future Equity (SAFE) and have proven “very popular,” according to Anthony Rose, founder, and CEO of Seedlegals.
Rose, who managed the team responsible for BBC iPlayer, co-founded SeedLegals in 2017 to assist innovators with prohibitively expensive legal bills while obtaining seed financing.
First, he has a negative opinion of entrepreneurs that use consultants while seeking funding for a startup. Yes, they may assist you in refining your pitch deck and investment proposal, but you should be the one seeking funding. VCs look down on entrepreneurs that outsource the capital-raising process.
Rose explains, “If you employ a consultant, they will need a retainer plus 6% of the cash you earn as a success fee.”
The service provided by SeedLegals is a reaction to the evolution of seed investing.
Rose states, “In the past, there was no venture capital or equity finance. You had no choice but to approach a bank, but a bank would never give you money since you were a startup and could not return the loan; therefore, the risk was too high.
He believes that crowdfunding may be beneficial for things that the public understands, such as beer or cosmetics, but is doomed for AI or deep tech startups, which the public does not comprehend.
According to Rose, “crowdfunding — the practice of gathering funds from a large number of small investors via the signing of little checks — only works if you have a crowd-working entrepreneur.” In addition, you must still raise 30 to 50 percent of your investment to make your crowdfunding campaign a success.”
Frequently, entrepreneurs resist venture capital investment.
According to him, venture capital is only invested when a company’s annual sales exceed £1 million.
“If you’re below that threshold, venture capitalists constantly want to keep you warm because they never know when a breakthrough will occur. However, they choose organizations that can flourish since they are currently producing income.”
Too often, entrepreneurs value their pre-revenue enterprises, which are, at this point, nothing more than a pitch deck, at a multiple of what it would cost to operate their startup for 18 months with their ideal staff, whether it be software engineers or sales and marketing professionals.
How to get financing for a new enterprise
To attract angel investors, you should first produce a one-minute pitch deck or video introduction to your firm and then “be shameless” about putting it on social networking platforms such as LinkedIn.
“In the past, you would create what you believed to be the ideal pitch deck and then present it to a venture capitalist, who would then tell you to return when you’re ready.”
According to Rose, the new method involves creating a pitch deck, releasing it on social media, and receiving feedback.
“You’d be surprised at how many people contact you,” he adds. “The louder you can create noise, the better.”
Social media may be a hybrid of fundraising and market research, making your startup more investable.
“The good news is that blatant self-promotion on social media is completely free. You can determine what your clients want by spreading the word and receiving feedback. The presence you get will assist you with refining your pitch deck and determining whether your venture is investable.
“You should be as noticeable as possible. Everything in a startup revolves on developing a minimal viable product and receiving feedback.”
In addition, you should confirm with the taxman that your company qualifies for either SEIS or EIS investment, which allows angel investors a 30% tax cut when participating in a high-risk startup.
Once you have secured seed investment from family, friends, or individual investors, you may construct a SeedFAST agreement, providing investors reduced shares in your firm when you raise capital, ideally through SEIS or EIS.
Mismatched pricing
According to statistics from SeedLegal, firms sell 15% of their shares during seed financing. The conventional pre-revenue market value is five times the required capital. Therefore, you would need to raise £3.5 million at a pre-money value for a requirement of £700,000 for 18 months.
At best, most investors would give you less than one million dollars.
“When people see the disparity between the value and what you’ve produced, I believe it’s best to take a succession of incremental steps to get there,” says Rose.
Rose’s main point is that entrepreneurs seeking startup finance have exaggerated estimates of how much money they’ll need to launch their businesses. Far preferable, according to him, is to start small and utilize the money you get for startup funding as a proof of concept and then iterate.
