Here are some tips and lessons we’ve learned about taking your business from an idea to a fully funded venture.
1. Make sure you get enough investment
It seems obvious, but put as much effort into your business plan and cash flow forecasts as you possibly can. Build in contingency, and test them with friends, family, colleagues & other entrepreneurs. Make sure you understand how much you’re going to need and why. Finding investment takes a long time – plan for it taking 6 – 12 months before you receive the cash. You don’t want to be half way down the process and realise you need more cash.
2. Selling the dream versus testing the path
Once you’ve got your business plan and projections nailed down, you’ve got a key decision to make. Do you take it to investors, sell them the vision of where you’re going to take your business in 5-10 years, then raise investment based on that? Or do you start small – proving the model on a shoe-string budget, showing you can make money in a profitable way, then look to raise big later. We’ve met successful entrepreneurs that have done the former, but it relies heavily on finding the right investor and your business plan and market projections need to be incredibly detailed. Our advice? Not everyone would agree, but we say start small. You’ll learn considerably more by testing your business model, product offering etc and, as a result, you’ll have a much stronger story to take to investors. This certainly worked for us. We used the Start-up Loans Company, a government backed scheme, to help us get up and running initially until we were ready to look for investment.
3. Trade equity for value, not just cash
It’s important to understand that getting investment in your business isn’t just about cash. Government backed investment schemes such as SEIS and EIS mean that there are lots of people keen to invest in start-ups, but you should also think about finding someone with the right skills and experience which will add value to your business. Make sure any equity you give away is in return for some real value that’s going to accelerate your growth beyond just the initial cash. Once you’re sure what skills or expertise you want, you can start trying to find investors that fit those criteria.
4. The Dating Game
There are several ways to find investors. Events where you pitch to a room of angels are a common way to meet a number of people in one go, as well as test your plan with live Q&A. However, our experience of this wasn’t great. There were a lot of time wasters who liked the idea of being a dragon investor more than anything else. Also, beware of people taking finders fees for getting you investment. This just isn’t necessary. In our experience, the best way is simply to reach out to other entrepreneurs you meet, old colleagues, friends and family. Our first investment came through a combination of these. Through meeting various people who had gone through investment, we met the UK Trade and Investment group, who in turn introduced us to a well-connected entrepreneur and investor. Not only did this individual give us brilliant advice on how to seek investment, he also introduced us to Venrex, a venture capital company who backed Orlebar Brown & Not on the High Street amongst others. Venrex subsequently invested in us, along with an angel investor we knew from our old careers who offered valuable skills and expertise.
5. Negotiating with your investors
Forget what you’ve seen on Dragon’s Den. The feeling and experience you have when you start to negotiate with your investors tells you everything you need to know about what they’re going to be like to work with. From the outset, our investors were concerned with our own welfare and what was best for us – they understood that the happier we were as founders, the more likely we were to be successful. All of our investors have been like this and continue to be incredibly supportive. If anyone is making things complicated, uncomfortable or making you feel uneasy – walk away. You have to trust your instinct and it’s so important to have the right people on board.
6. Think long term about your equity
Do not give away too much of your business in the beginning. There are so many start-ups out there who have given away 20-25% of their company for tiny amounts of investment before they even begin and it hampers them in later investment rounds. You need to work backwards from what you’re trying to achieve. How many rounds of investment might you need to go through? How much more money might you need to achieve the desired scalability and acceleration? And crucially, how much equity are you prepared to give away compared to what you want to retain at the end? This is particularly important if there is more than one founder, as in our case. If you don’t think you can raise enough investment without giving away too much initially, then consider asking friends & family for a loan, or working with the Start-Up Loans Company like we did, until you can command a stronger valuation.
7. Extract maximum value
When your investors are selling the strength of their network, their experience, their skills, hold them to it. Agree on regular touch points where you share your weekly challenges, ups and downs and get the most help from them you possibly can. The reporting process is really important for both sides – it keeps us tracking against our targets and we really look forward to our board meetings every 6-8 weeks. We look back at the positives and the negatives, and consider the challenges we need to focus on. It’s important to stick to this and make sure you’re reflecting, revising and learning as you grow.
8. Timing is key
It’s important to have a good plan of when you will need to raise investment as you scale your business. In our case, we planned our first raise after our first Christmas sales period to maximise our valuation. However, remember that raising investment when you have cash flow challenges is not a good idea. Plan ahead and make sure the cash you raise gives you enough contingency, then make sure you don’t run out of cash before your next planned raise. You can make as many sales as you want, but if you don’t have cash to support the business you’re going to run into problems. Not only will people be less likely to invest, if they do they’ll want a much lower valuation. We were in a relatively strong position when we went looking for our second round of investment. This next round was needed to help us accelerate our growth and handle the subsequent sales spike over the next Christmas period.
9. Always network
It’s really hard when you’re growing your business, but it’s so important to keep meeting people that might be good mentors, or future investors. We always try to find the time and once we’re there, we’re game for a chat with anyone. You just never know where meeting people will take you. Simple networking led to David Gandy becoming an adviser, friend and investor. He’s been an incredible supporter and spokesperson. Recently we met the Australian rugby legend John Eales at an event. He later asked if we were open to him investing because he has great connections in Australia. So now we have a great partner who wants to help us expand into Australia.
10. Following the crowd
Crowdfunding is one of the fastest growing investment mechanisms, whereby you pitch your business online and receive your overall funding target from lots and lots of small individual investors. We’ve seriously considered using it on two occasions, but decided against it. This doesn’t mean you shouldn’t use crowdfunding, but here’s why we didn’t. Firstly, one of the key benefits of raising money from the crowd is supposed to be the idea of getting investment from a large group of people who will be super-engaged brand ambassadors, helping to share and grow your brand amongst their friends and network. However, most successful fundraising brands we spoke with had experienced exactly the opposite – few of their crowd investors showed any level of engagement whatsoever. Also, the brands who had completed successful campaigns had all executed thoroughly well-planned, well funded and well resourced crowdfund campaigns. The process of raising funding in the crowd seems heavily reliant on your ability to run a comprehensive marketing campaign, plus you still need to find the majority of your investment yourself first, then use the crowd to top up your target. Lastly, some crowdfunding platforms require you to handle the paperwork and Companies House processes directly with each individual investor, which can be a painstaking amount of admin when you have hundreds of individual investors. Particularly when you want to raise again in future and have to ask them all if they want to invest before you can ask new investors.
If you have any questions about seeking investment, feel free to email us (Ryan & Dave) here.