Fundraising: How, where, when?
6 min read
27 October 2015
Raising funds is a complex part of the business cycle. Here's what you need to know about fundraising.
Combining years of experience as an entrepreneur and now immersed in that startup to scale-up stage with my current venture, one thing’s clear; every small, startup and early stage business is cash-hungry.
What separates the success stories from the less-so is how, where and when they can raise their funds. It can be a complex part of the business cycle. Here’s a low-down on some of the tried and tested paths.
Before you get going – pre-commercialisation
There’s a myriad of different grants and funding opportunities for individuals and businesses involved in the R&D and pre-commercialisation of products and projects. The challenge is how to see through the noise and understand the correct funding option and how best to apply for it.
I’ve found that this area of fundraising often benefits from bringing on board a specialist. Go for someone with a great track record, who’s not going to burn your time and enthusiasm.
The “let’s go” phase – launch capital
Launch capital is traditionally achieved via the bootstrapping of the founders (and some of their close friends and family).
It’s important to risk your own capital, if only to show future investors that you were willing to put “skin in the game” with the launch. By investing your own time and money at this very early stage, you will be driving initial traction and value into your business before needing to reach out for subsequent funding rounds.
With every penny being super-crucial (and very personal) you will also want to avoid over-engineering the launch platform or product, and burning cash. At this stage it’s vital to base everything around the lean start up methodology i.e. maximum learning, at minimum cost.
And grow… seed funding / business angels / crowd funding
There has never been a better or easier time to raise seed finance. Programmes like the government-backed SEIS scheme are helping foster a new culture, incentivizing early stage investment via tax relief.
Once you’re up and running – ideally with market traction, feedback and learning – then seed funding is potentially the next step to raising sufficient funds to help you break through to the next level.
Timing is crucial here. You want to be going to the seed round as late as you can (in terms of increasing the valuation) and asking for as little as you need (so you’re not giving too much away, too early).
Otherwise, the valuation and/or how much equity you have to give away will be impacted and it’s not just about the current round. The amount you give away and the valuation agreed, will have a knock on effect with later funding rounds.
Raising money is a time consuming affair that often falls to the founders or a very and core operational team. Without enough traction or market validation, you may be wasting valuable time and market credibility going to early too market.
When you do, there are many options available for raising a seed fund of £50,000 to £500,000. These range from SEIS funds through to crowd funding and match funding and business angels and angel investment networks. Pitching events offer great opportunities too.
What’s the alternative? Alternative finance
Also an emerging channel in recent years – particularly since the credit crisis of 2008 – is alternative finance with providers who don’t look, sound or act like your traditional high street banks.
Many alternative finance providers have emerged in recent years, companies like Fleximize provide a rapid response services for smaller business and SMEs, with flexible lending terms from £1,000 upwards.
Getting serious – Series A/VC
I’m not covering VC or Series A funding in this article, but ambitious startups often aspire towards a Series A round and view the seed round as creating sufficient runway for that next step. The key is to understand as much about this as possible in advance so you’re shaping your business (and argument) accordingly.
What is important with any Series A raise is that funding decisions you made earlier in the business life cycle, can have a dramatic impact on what is possible further down the funding chain. As mentioned above, the classic mistake is to over-value your business at the seed round, and find yourself with little headroom when you arrive at Series A.
Ultimately, experience shows that if you have a great project, a strong team and sufficient traction, the right funds for your business are out there. Know where you want to get to and how funding will take your there. Good luck!
Andrew Weaver is CEO of LawyerFair.