The pros and cons of raising investment

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Runway is the resource we wish had been available when we first started out fundraising almost 10 years ago.

Our goal with this platform is to educate as many people as possible on the nitty gritty details of what it really means to raise investment so that you feel empowered to make decisions that are right for you and your business. That starts with weighing up the options and taking a look at the pros and cons of raising investment, afterall raising money isn’t the be all and end all and if it’s not right for you, then great we’ve helped you reach that decision before you get too invested (ahem couldn’t help ourselves!) process.

Pros

Fuel for growth.

When it comes to running a business, you’ll inevitably get to a stage where you feel like you’ve got all the pieces in place, you’ve built the car and now you need to put gas in the engine to make it go. There’s only so much you can fund yourself from your own personal investment or through sales and profit before growth plateaus which is where raising money comes in. Oftentimes a much needed cash injection can take the business to new heights as you have the capital available to invest in your team, processes, product and of course, marketing.

Accountability & governance.

Raising investment takes your business to a whole new level with regard to accountability and governance. Lots of the processes put in place when you raise capital are best practice for running a business regardless of whether you have investors on board, but the fundraising process itself gives you the opportunity to take a strategic, birds eye view of your business and put the reporting, accountability, process and governance structures in place to help you scale.

Here’s a few of the processes and governance structures we’d recommend as a starting point:

  • Building a board of directors to assist the CEO in achieving strategic objectives
  • Quarterly board meetings (with board packs on financials, progress and goals)
  • HR strategy and processes (parental leave policies, hiring plans, team reporting and team development – often these fall by the wayside in the early heady days of start-up life but one you raise money, they are non-negotiables
  • Insurance – business, liability, employer and key-person are all essential

A path to exit.

Once you raise money, you’re on a path to exit. Investors are ultimately looking for a liquidity event (opportunity to get their money back and then some) and will help drive the business to this point. Whether that comes in the form of supporting you with future fundraises, advice, strategic guidance, introductions to relevant stakeholders or the exit process itself.

How quickly you’ll go down that path is largely dependent on the investors you have on board and where exit falls in your strategic plan.

Support & structure.

Investors, for the most part, are incredibly supportive. Providing you get the right kind of investor on board at the right time, they can provide you with the necessary support and structure to achieve your goals.

Afterall, investing in your business likely won’t be their first rodeo. Investors can bring a wealth of knowledge, support and network to your business and draw on the experience of their other portfolio companies to help you grow.

Cons

We’re not huge fans of the word “con” and see the following points more as “downsides” rather than any being a real reason you shouldn’t raise money.

You have to manage your investors.

Once you have money on board, you will have to manage your investors. Whether it’s the paperwork of filing EIS1 forms so that investors may claim their relevant tax relief or to communicate company updates, there’s no getting around the fact that you now have a long-standing relationship with your investors to whom you’ll be held accountable.

Don’t worry it’s not all doom and gloom. Contrary to popular belief, investors (at least the decent ones) won’t be breathing down your neck every minute of the day and pouring over your every decision; they will be there to support you. It’s much easier if you set the standard for how you plan to communicate with your investors from day one. As best practice, we recommend sending a quarterly detailed update and a monthly high-level update to investors as well as an annual report. Whether you delegate investor relations to a member of your team, or take the role on yourself, we recommend you provide clear instructions to investors on how best to get in touch with you, particularly if you have a group of investors from a crowdfunding campaign.

If you’ve raised from a fund or an angel group, they will likely appoint an Investor Director or Board Observe who will be your key point of contact and responsible for relaying communications to the rest of your investors.

If any of the above sounds like your worst nightmare, don’t raise equity investment.

You’re getting on a growth train you can’t get off.

Raising money is very similar to sales, except instead of acquiring customers, you’re acquiring investors and instead of selling your product, you’re selling your business. During the fundraising process you’ll have sold your investors a vision. Hopefully this vision includes plenty of growth, disrupting your industry, making the world a better place, hiring a world-class team and eventually delivering great returns for all. Once you’ve raised money, you’re on a path to exit and you’re on a growth train you can’t get off. Having a lifestyle business isn’t an option with most investors.

It’s worth adding that there is nothing wrong with having a lifestyle business, or a business that grows organically year on year, in fact it can be quite lucrative for you as a founder, it’s just not big enough (read £30m-£100m++ exit opportunity) for most investors to get on board with and other forms of finance are often much more suitable.

It takes time.

Unless you’re a serial entrepreneur who can call on a warm investor network, it takes time to raise money. And even then, there is often a cap on the number of rounds or amount founders can raise from their immediate network regardless of their track record.

There are no quick wins in equity investment and you’re largely working to their timeline. 4-6 months is completely normal from start to finish (finish being the day you get the money in the bank) but can be much longer depending on who you are raising from and how much. If you have 8 weeks left before you run out of money, you’re facing an uphill battle and will likely need to make considerable concessions on ideal investor, terms and valuation to get cash in the bank.

It costs money.

It costs money to make money and it costs money to raise money. We go into the detail in this article here (link to fundraising fees explained) but expect to budget 5-10% of your fundraise for fees.

Looking for more specific advice and a sounding board for what might be right for your business?