By Ed Molyneux, CEO and co-founder of FreeAgent
Getting a business off the ground even in the best economic circumstances is a considerable challenge but, in some ways, growing up in challenging times means you build a stronger business for the long-term. We have certainly grown up since 2007 when we launched FreeAgent.
Over the last seven years we have sought and secured more than £5M progressively in external funding which has helped with our development and growth. This takes a lot of time and is a full time job from shortlisting potential investors to getting the cash in the bank. I estimate that I have spent about a quarter of my time on this to date but it has been critical in accelerating our development and current position in the market.
After building our business - “bootstrapping” it - for the first two years, my co-founders and I reached the point where we had real paying customers. Those two milestones are important, because software is now cheap to build and launch and the days when you could raise money with just an idea and a smile are long gone.
When it comes to actually securing investment, you hear stories about entrepreneurs going cap in hand to the banks or other major lenders, armed with 43-page business plans that detail every step of their company’s future. But my own experience of raising money is that it’s not about long, detailed documents - it’s about telling a convincing story with passion.
Many tech start-ups are started by people who don’t necessarily have much experience of building companies, so their track record can appear insubstantial. But it’s actually these technical founders who are often the ones who go on to build very successful businesses. Angel investors understand this and they are likely to invest as much in the entrepreneur and the team as they are in the actual product.
Investors invest in lines not dots – they want to see a positive vector of progress not just a snapshot of the business. This means that you should be building relationships with potential investors even before you’re thinking about raising capital to get them interested and excited in your story.
The vision is important; you need to convince your investor that you are building a company which can secure a decent chunk of the market.
In each successive round of financing we’ve always planned to return to break even within 12-18 months with a little cash still in the bank. You can adjust spend on the way down (assuming revenue is growing) to account for growth being a bit faster or slower than you anticipated. But for us at FreeAgent it means we can decide to raise capital or not as we see fit, and it helps us to sleep at night! The more aggressive approach, where you spend money faster and need to raise more money again in 12 months means that you’re in big trouble if there is no money available for whatever reason. You’ll also attract much worse terms if your potential investors know you’ve only got three weeks cash left in the bank!
When negotiating the deal with investors it’s important to concentrate on the terms rather than optimising purely for valuation. Find a lawyer who can help you model the effect of terms such as Participating Preferences, which can have a much bigger impact especially if they become standard for later rounds.
Ultimately, it’s a numbers game - you’re looking for someone who shares your vision enough to want to fund it, and your idea may only resonate with a handful of individuals. After all, if it was simple and obvious, it probably would have been done before.