Advice from David Pattison - Investment expert & Best selling author
When you are new to fundraising, it is easy to believe that all investors are the same and that you don’t really have a choice of the investor. I often hear leaders looking for funding saying, ‘surely I just take the best financial deal?’
Whilst money is clearly the main element of fundraising – the clue is in the name – there are a few other things to bear in mind when raising money. Giving yourself a choice is something you should always be aiming for.
The first thing to do is to make sure that you give yourself plenty of time to raise the money. The tighter the timing the less choice you will have and the more the deal will favour the investor.
The second thing to do is to be very clear on what you want the money for and what type of investor you want as part of your business.
What type of investors should you be looking at? There are a range of options but here are four types that you might consider dependent upon what you are looking to get from your investors:
It’s just about the money
If you really just want arm’s length cash then you will need to focus on getting more than one party interested to introduce some competitive tension in the process. Make sure that the investors understand that they are not going to be involved in the business. Almost all investors want to have some say or input. These investors are usually Seed Investors through Angel Investors to High Net Worth Venture Capital investors and Private Equity investors tend to want to be involved and monitor you closely.
Strategic help, advice and money
Often at early-stage Seed or Angel Investment young businesses are looking for strategic help or experienced advice. Getting individuals to invest and help can be really helpful to young businesses, and there are a lot of government tax breaks available to encourage these investors.
Later in the process, a lot of VCs and PEs will have a roster of advisors who they will often insist are on your board as part of the deal. They are very often a useful addition, but you need to be clear in your own mind that this is part of the deal.
This is a relatively new way to raise money. You can raise money in two ways; a straight equity play or you can use your business offering to incentivise investors. This type of funding works very well if you have a product that is attractive to consumers. The incentive route is widely used and attracts a lot of part-time investors.
This form of fundraising is a good way of raising arm’s length money, but it can give you a very long cap table and it isn’t a straightforward process and can be expensive in comparison with other routes.
Trade investors will usually operate in the broad space you are in. They are not consistent investors and can be hard to engage in difficult times. They are more likely to get involved early or be the purchaser at the end of the cycle.
They tend not to take lots of risks and will not always be able to offer the very highest valuation.
Having said that, they understand the space will help with experience and contacts and can be more forgiving when it comes to under-performance.
In truth, there are so many different types of investors. My advice is always to be in fund-raising mode even when you aren’t looking for money. You might end up drinking a lot of tea, but you will meet interesting people who will be interested in you and your business, and money will come from unexpected places.
Two things to remember:
Never underestimate how hard it is to raise money and how long it takes.
Never forget that investors only care about one thing and that is their money and how much they will get back.
David Pattison is a start-up funding expert, business chair and mentor, and author of The Money Train: 10 Things Young Businesses Need to Know About Investors. The book won best Startup / Scaleup book at the Business Book Awards 2022.