What to avoid when seeking funding for your startup
6 min read
06 November 2019
Funding for start-up businesses is, in its own right, a booming business, primarily due to the explosion in the number of start-up businesses themselves.
Even at the very early stage, raising funds for your new business idea requires a well-developed business plan which covers at least the basics.
Unfortunately, despite often having a good idea, not everyone gets their initial funding round right. Having done it three times myself over the years, I’m a great fan of someone setting up their own business.
The food and drinks space is “bursting” with startups
The startup trend has now become mainstream and this is particularly evident in the food and drink space with an explosion in startups over the last five years.
A number of drivers have fuelled this, in particular, the difficulty Big Food is having trying to convince consumers (particularly Millennials and Gen Zs) that they have their best interests at heart.
I find that many (though by no means all) investment pitches I receive are not convincing enough to force me to make an investment.
Younger consumers are increasingly sceptical of Big Food claims and motives.
On the other hand, they find startups, with savvy entrepreneurs explaining how they are going to make their world a better place, much more appealing.
Forms of funding
While “friends and family” continue to be reliable sources of very early-stage funding, large numbers of startups have found crowdfunding to work remarkably well too.
Food and drinks brands hold a unique appeal
This is because, ultimately, we are all consumers.
We all have to eat and drink and it is much easier to understand and frankly relate to a business that sells a product we can use ourselves – and repeatedly.
Add to this the authentic and (social) media-friendly appeal of new brands in this space and it’s not difficult to see why this is a very crowdfunding-friendly industry.
My own investment strategy
Angels and angel consortia continue to play a significant role in seed investments – particularly when the entrepreneur understands the advantage of attracting “smart money” to help grow their business.
My views are undoubtedly coloured by my own personal investment strategy, which tends to follow what I know best myself – FMCG, (fast-moving consumer goods), with a strong emphasis on food and drink.
Typical investments might be in the region of £100K and these tend to be mostly startups and early-stage growth businesses (i.e. Seed and Series A).
In my experience, I find that many (though by no means all) investment pitches I receive are not convincing enough to force me to make an investment.
Areas where pitches “fall down”
There are a number of areas where they tend to fall down.
Many entrepreneurs pile into the food and drink sector because they believe they have identified a gap in the market, but have very little idea how they should go about addressing it.
Pitches tend to typically contain one (or more) of the drawbacks listed below, which makes the investment even higher risk than it needs to be.
1. Valuations are not based on reality
The entrepreneur needs to base their valuation in the real world, reflecting all three of the following elements:
- Business potential
- Evidence of growth
In the early days, there is likely no momentum and little evidence of growth and valuations need to reflect this.
Valuations which are based on enormous potential and very little else lack credibility and only serve to tee-up a huge down-round at the next funding round.
2. Not having a defined target market
In FMCG, it is essential to define one’s target market very carefully as the entire marketing and communication strategy is predicated on knowing who this market is, where they are and how they spend their money. If you try to speak to everyone, you’ll end up speaking to no-one. Many entrepreneurs fall into this trap.
3. Entrepreneurs who don’t listen
I’m all for being challenged and being pushed back by the entrepreneur who has a better idea or reasoning for doing something differently.
However, when an entrepreneur simply ignores or becomes defensive in the face of a challenge or searching question, then I lose interest rapidly.
4. Business ideas that are not scaleable
Passionate entrepreneurs are great – in fact, without passion everything becomes more difficult.
But when someone starts a business which is demonstrably difficult to scale, (at least in relation to the extent required by the investment requested), then no amount of passion can compensate for this.
A potential investor will realise this will never deliver them their required ROI.
Claiming you’re “the next Fever Tree” won’t help you. They’re really the exception to the rule. If you’re this kind of ‘pitcher’ then my advice would be to heed these points and get a dose of reality.