You’ve had help from all of your family and friends, you’ve exhausted the options of government grants and R&D tax credits and you’ve invested out of your own pocket. You’ve been through some of the initial growing pains, you’ve earned your spurs bootstrapping the business and now you’re ready to kick on to the next level of growth by utilising external funding options.
The first choice is whether you want to raise money from debt or equity. I won’t go into detail on the debt choices as my colleague has done a fantastic job of outlining a variety of options here. There are, however, a number of different options when raising early stage equity funding:
For early stage companies, and big ideas, crowdfunding has become a popular choice in recent history. It can be a lot less time consuming than other funding options, saving you from endless visits to the bank or private offices to pitch your idea. The need to stand out from the crowd on the crowdfunding platform may also give creativity and clarity to your marketing strategy.
This option has great potential to create exposure for your business where your customers can become your investors, and by extension your advocates to the market. Due to this, however, crowdfunding is usually more suited to those creative industries, or those with a direct consumer focus, rather than one focused on the B2B market.
Good places to start: Kickstarter, Crowdcube, Seedrs
When looking for minority equity funding typically up to c.£500k, business angels are a great place to look, engaging high net worth individuals (or groups of individuals) who invest in early stage small businesses. With their ability to utilise EIS and SEIS tax break reliefs [link to PwC website], business angels may have more of an appetite to take an educated “punt” on an idea that has great potential, but hasn’t yet gained significant traction in the market place.
Despite this, it will not be “easy” money. Business angels will most likely still carry out due diligence and competitor analysis on your business and you will need an extremely compelling business case in order to part with their hard earned cash.
When looking at business angels for investment, think about what you want from your partner. Is it just their money at this stage, or their advice, guidance and black book of contacts? Remember that while the business angel is investing their own hard earned cash, you will be giving away a part of the business you’ve worked so hard to build up. It has to work for you.
Good places to start: VentureFounders, AngelsDen, AngelList, London Business Angels
Venture Capital Trusts
A Venture Capital Trust (VCT) is the mid-point between Business Angels and Venture Capital Funds. For investing individuals, they’re highly tax efficient, with the opportunity to offer their investors tax break reliefs (much like Business Angels) and as such, can be highly attractive ways of raising investment. Despite the continued tax breaks, it’s a good way of gaining slightly more sophisticated investment, which is generally seen to be less intense and hands on than Venture Capital Funds. While less intense, they still carry out their due diligence and you will need to ensure your pitch deck, valuation and financial projections are of a high quality to ensure that you’re in with a chance of VCT investment.
Despite the name, remember don’t confuse VCT with a Venture Capital Fund!
Good places to start: PwC Raise
Venture Capital Funds
When typically looking for funding of £1m+, or your Series A and beyond, the most logical place to start is with Venture Capital Funds (VCs). VCs should be “smart” money. Aside from significant funds, they can bring fantastic experience and business expertise having worked with other companies in your position, helping them scale quickly. They may have great contacts within the industry, and tapping into these can help your business grow.
There are two key questions to ask when looking raise VC money. Are the VCs right for you? And are you right for the VCs?
Compared to crowdfunding or business angels, however, VCs whilst also being minority investors (unlike Private Equity) may expect to play a more direct role in the strategic direction of the business. It is therefore vital that you bring in the right partner to work with you, especially as a VC could be in the business working with you for the next 5-10 years.
The process of raising money from a VC can also be an intense and time consuming process. Writing and perfecting your pitch deck and delivery, ensuring your financial projections are watertight, settling on a sensible valuation, negotiating a term sheet as well as fielding questions during any due diligence, the process takes significant mental endurance! It’s vital that any time you go through the process of raising money, you have enough bandwidth to do so, and don’t lose focus on what has made your business successful – i.e. running the business on a day-to-day basis!
VCs usually like to see that your businesses has already gained good traction in terms of revenues (i.e. the often quoted £1m+ annualised run rate) and customers or super-user adoption, and that your competing in a market place that has significant potential.
If your business has hit these criteria, and you’re ready for the challenge awaits you, then you’re good go!
Good places to start: PwC Raise
Family Offices are a vehicle for ultra-high net worth individuals to invest their money. Their appetite for risk, and style of investment can vary from fund to fund, with some acting like Business Angels, and others more like Venture Capital Funds. Ensuring that you do your research on the type of Family Office you’re speaking to is imperative. To find out a bit more about Family Offices, see the blog my colleague Omar has written here [link to http://pwc.blogs.com/deals/2017/06/are-you-a-startup-looking-for-a-family-office-investor-.html].
Good places to start: PwC Raise
Glen Waters and Richard Abrahams are part of the founding Raise team, that help support scale-ups get “investor ready” and help raise them venture funding.
Glen Waters. Email: firstname.lastname@example.org or Tel: 07950 324018
Richard Abrahams. Email: email@example.com or Tel: 07525 926556
Find out more about PwC’s Fast Growth team can support your growing business: https://www.pwc.co.uk/private-business-private-clients/growth-companies-programme.html
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