The first question to ask yourself, before even assessing the different funding routes open to you, is ‘where do you want to go with your business?’.
Investors are ultimately looking for a return on their investment so it’s important to consider this from the outset. What are your growth plans? How much capital will the business require? What is your exit strategy? And in what timeframe? Are all important questions you need to answer before embarking on a fundraise as the answers will inform the investment strategy you take.
You also need to look honestly at your current business position and ask yourself whether now is the right time to raise equity finance – look at your traction, revenue, path to profitability and valuation. These are the things investors will interrogate and you need to be able to provide robust answers.
Once you’ve decided that growth finance is right for your business, you may wish to consider the following routes of funding for your business:
Friends, family & your own contacts>
Angel Investors / Syndicates>
Friends, family & your own contacts.
This may sound like a scary place to start, but it is often a sensible first step if you have never raised investment before.
- Honest opinions from those you trust: Those closest to you are likely to give you some truly honest opinions about your business and its potential trajectory, particularly if you have worked with them in a professional capacity in the past. This honesty will be sharpened further if you are approaching them for money! Previous colleagues, professional contacts and former bosses know what it’s like to work with you better than anyone else. They’ll likely be your biggest supporters and provide some assurance to people who don’t already know you.
- A training ground: Approaching friends and family is a great training ground for your later approach to other investors. They may not be experts in your sector, but they are likely to ask some of the questions investors will also be interested in. Use it to hone your Q&A skills and ensure that you can communicate the critical elements of your business clearly and concisely.
- Investments carry a risk to capital. So it’s important that you communicate this and all parties understand that they may lose all of their money. You need to be OK with that too! If you couldn’t live with yourself if you lost your brother’s retirement fund or your mum’s nest-egg then don’t ask them to invest!
Crowdfunding has democratised the investment landscape by allowing members of the general public and wider investment community to invest their money into businesses they may not have otherwise had access to.
There are two types of crowdfunding:
This is where you give people, as known as pledgers or donors, rewards in exchange for money. This form of fundraising often works best for B2C or product-based businesses who can give pledgers something tangible in exchange for backing them.
The most widely used platforms in the UK include:
Here’s how the fees compare:
Launching a successful rewards campaign can be a great way to build a movement and community behind your brand and business at an early stage. You can leverage this momentum once you’re a little further down the line with some more traction to run an equity crowdfunding campaign should you wish to raise again in the future.
Rewards campaigns typically work best when raising smaller amounts of money although this doesn’t make them any easier!
Equity crowdfunding is where you raise money in exchange for shares in your business.
Although there are elements of marketing that make a crowdfunding campaign a success, ultimately, equity crowdfunding is very similar to any other form of equity fundraising. You’ll need to value your business and put a price on your round and sell shares in the company. This comes with legal process and due diligence as well as puttinsg together the investment proposition and assets. Equity crowdfunding is no longer seen as a way to raise a small amount of money (although you can still raise small rounds this way) but increasingly as an important part of growth rounds, with Monzo, Mr & Mrs Smith, Citymapper, carwow, Thread and Penfold all turning to the crowd as part of larger fundraises alongside institutional investors.
The most widely used platforms in the UK include:
Here’s how the fees compare:
Source: Crowdcube.com & Seedrs.com
*It’s worth noting that if you’re considering raising investment via crowdfunding we recommend that you speak to BOTH platforms and make your own choice based on what you feel is the best fit for you and your business. Fees may play a part in this, but it should never be the deciding factor.
- If your business is consumer-facing, crowdfunding is a great way to gather future loyal customers: Consumers who invest in a business feel far more engaged in its success and are more likely to choose your products or services over a competitor. If you have an existing community it also means they can be mobilised and become your biggest advocates as both customers and investors.
“Our shareholders are some of our most valuable and engaged customers. On average they are 43% more active and are nearly 3x more likely to tell a friend about us. It’s not why we do it but it’s great to be able to include them in our journey.” Tom Blomfield, founder of Monzo
- Allowing the public to invest directly in your business helps humanise your brand: This is particularly beneficial to already successful, large organisations and it is something that has been capitalised on by businesses such as Mr & Mrs Smith. This ethos of “we’re in it together” is also very much inline with the consumer zeitgeist. Consumers expect businesses of today to be transparent and to give something back.
- It’s good business: With sustainability firmly at the top of many organisations’ agenda, crowdfunding fits in with overall company values by giving others that wouldn’t otherwise have the chance to invest (either because they wouldn’t have seen the deal or they couldn’t afford to participate in a professional capacity) the chance to own shares in companies they believe in and share in their future success.
- Like all forms of investment crowdfunding is time intensive, it’s not a quick win solution.
- It can be expensive. The fees of platforms stack up, especially if you’re working with an agency to support you on the raise (which you should – read why here). This doesn’t mean it’s not worth it – in our opinion it’s money-can’t-buy exposure and customer loyalty.
Quick side note to debunk some common myths:
– Crowdfunding is not viewed poorly by institutional investors, or angels, if it is executed on well.
– Crowdfund investors are often held in a nominee structure unless you have a minimum direct investment threshold (usually between £20,000 and £100,000). This makes the paperwork much easier to manage and keeps your CAP table as clean as possible.
Read more about how much money you need to raise before crowdfunding here.
Angel Investors / Syndicates.
Often the first or second investment into a company, angel investors are arguably the biggest risk takers of any investor across the entire spectrum. They invest their own personal money and invest at an earlier stage than any other prospective investor e.g. venture capital firms, EIS funds, private equity funds, corporate VCs. Angel investors may invest alone, or as part of an informal group or more formal syndicate.
- They consider more risky propositions: Angel investors are willing to take a punt on riskier business models as their start-up investments typically account for only 10% of their investment portfolio. This means they are not put off by organisations with riskier business models or operating in growing, but not yet established, sectors.
- Great connections: Angel investors often have great connections with other investors, many of whom will follow one another’s investments. We have seen this lead to multiple angels being brought into a round, matching the initial amount invested by a first angel. Angel investors also tend to invest in businesses they can support in some way by opening up their professional network.
- Time: There are no quick-wins when it comes to raising investment, but finding, courting and converting the right angel investor, or investors, for your business can take months of work and a lot of outreach. In short, you’ll have to kiss a lot of frogs.
- Dilution: Angel investors generally have a higher appetite for risk and therefore invest at earlier stages. But this comes with price and often angel investors will negotiate hard on price and demand higher levels of equity to compensate for the risk.
Venture Capitalists (VCs).
VCs are focused on investing in businesses which have the potential to grow rapidly and can earn them and their clients big returns. They are more institutional than angel investors and investing on behalf of others through a fund. There are hundreds of VC funds in the UK and most will focus on investing at a specific stage or in a specific sector.
- VCs carry a lot of weight: Having a VC back your company can encourage other investors to come in on your round as they will have conducted in depth due diligence on your business, ensuring what you have pitched to them is actually true. This means other investors tend to come in on the round with confidence that the assumptions presented by the business have been stress-tested.
- They have networks: A lot of VCs have large networks they can call upon to support the growth of your business, from talent pools of people you could hire, to making strategic introductions to other businesses they have backed to mutually benefit the growth and development of both businesses within their portfolio.
- They tend to have deeper pockets: VC funds tend to want a seat at the table and therefore invest larger sums. They also expect to follow their money and invest again.
- It’s really important to consider your future goals and plans for the future. If your goal is to exit your business in the future for a substantial sum (read hundred of millions, if not billions) then raising money from VCs might be great for you.
- The process can be long: You need to kiss a lot of frogs before you meet the right match. It’s critical you get along with your investors (wherever they come from) but this is even more pertinent when it comes to VCs. Expect lots of no’s, lots of delays and lots of due diligence (which could still lead to a no).
- This is more best-practice than a con, but nevertheless, this is even more essential when it comes to raising from VCs – expect a lot more governance! This means board meetings, reporting and a tonne of accountability.
Debt finance can provide a significant and quick cash injection for your business, if you have a good financial record, in the form of a loan. It is important to review the interest associated with this form of raising as it could be significant when compared to an equity raise. However, with the rise of peer to peer lending, debt financing your business could get you in a position to raise your first round of equity finance. Achieving initial finance puts you in a very strong position as you will have the traction and revenue to command a valuation that won’t dilute your shareholding by too much, protecting you for future equity rounds.
- Speed: If your financial records are generally positive, and you can show the lender your repayments will be affordable, receiving debt finance is a relatively speedy way to secure a cash injection for your business.
- Boost your valuation: You should consider if a loan cash injection will enable you to hit some quick growth metrics, help prove your traction and the need for your business in the market. This could increase your company valuation as a result.
- Debt! It is exactly as it says – debt may either be secured or unsecured and it will require repayment. It’s essential you can afford this.
- It can be a sticking plaster: If your business will require more funding in the future, it’s likely that debt is a one-time option, which means you need to ensure you spend it wisely and it can get you to your next point of inflection growth so that you can raise an equity round at a later date.
Some other insights to consider…
- If you have raised investment before you need to be thinking about whether you have achieved what you said you would achieve in your previous rounds. Did you hit the revenue forecasts? Have you entered the new markets you said you would? This will help you establish whether debt finance or equity finance is the best option. If you’ve not hit your targets it’s more likely that you’ll be looking at a ‘down round’ (where your valuation is less than in your previous round).
- Be open to all types of investment. When you raise, it’s likely that your round will be made up of multiple sources eg: a syndicate, angels or VC – if you have a lot of investors and a large customer base you could combine these using a crowdfunding platform.
- You could be eligible for match funding. This depends on where you are located in the UK. For example in Scotland, the Scottish Investment Bank often “match fund” businesses who meet certain criteria.