Arguably the biggest challenge in leaving your secure well-paid job behind and starting out on your own is funding. You have rent to pay, food to eat and a business to launch! Unfortunately, unless you’re already well off, you will need to go through a difficult phase of not earning and needing to spend money on material, coders, marketing and more. This first phase is the ‘bootstrapping’ phase. You cannot raise money on an idea or a business plan. You need a lot more.
Stages of funding
Before you quit your day job, develop your business plan, analyse the market, the competition and your future customers. Get out on the street and talk to customers. You can set up a website (for free) and simply state your value proposition and ask page visitors, if they’re interested in what you’re offering, then they should enter their email address and you’ll let them know when you’re live. You can also use this landing page to ask further questions to better understand your customers e.g. what price would you pay? How would you like to receive the product or service? etc.
Once you’re confident your business has a chance of success, and you’ve understood from your customers what they want, you’re ready for your ‘Friends and Family’ funding round. This is when you ask your network for ‘pre-seed’ money. This might be around £50k and it allows you to build a prototype and launch a minimal viable product. This allows you to start testing something ‘real’ with a customer. You can secure pre-orders off a prototype.
After you’ve secured your initial customers, you’re ready for your ‘Seed’ round of funding. This will usually be around £150k but can be as high as £2m. This funding helps you gain traction with your customers and start building revenues.
The next funding round is called ‘Growth’ funding or otherwise known as “Early Stage” or Series A. This financial round enables you to scale. At this stage, you should expect to have a much more formal board and team. You will be raising between £500k-£5m. The range is so large because it depends on the industry. If you are in Lifesciences or Deep Tech, chances are you’ll need a lot more funding than a retail product or service business.
Following Series A, there’s a Series B and C. At Series B, you can build groovy headquarters, make competitors give up and you are growing >£3M. By now you may own <10%. However, you more than likely will have a valuation north of £20M.
Series C is usually the final raise before going public. Your company is valued >£100m. Your company has >100 employees and is operating in more than one country. Angel investors and founders may wish to sell before this stage unless you will be a unicorn.Finally, Initial Public Offering or IPO. The IPO’s opening stock price is typically set with the help of investment bankers.
The diagram below illustrates this funding journey:
Types of funding
At Seed Round you’ll seek funding from ‘Angel Investors’. At Series A and beyond you’ll seek funding from Venture Capitalists. Below explains who they are and the pros and cons of working with them.
Business Angels are high net worth individuals who invest their own money into early stage new ventures. Often experienced entrepreneurs. Often provide advice and make introductions to suppliers, distributors and customers. £20-£250k is usual investment but some ‘super angels’ and angel syndicates may invest far larger amounts (£1m +). There are c.8,000 active angels in the UK.
- Can open doors by introducing the entrepreneur to customers and other investors.
- Will act as an ambassador for the company and might even get some sales.
- Can share experience and highlight missing elements for the business to grow.
- Angel investors work similarly to VCs except they are much smaller. In the end, this allows you to keep control over your company, earn mentorship when it’s needed, and hopefully make money as your company continues to grow. Angels are more flexible than VCs.
- Might have a different view of what your company should do that clashes with the entrepreneurs.
- They will aggressively press you if you are not delivering as expected to protect their money.
- Some investors will take advantage of entrepreneurs with no funding experience. Do your homework on how the funding process goes and find an impartial and experienced adviser during the process.
- They often want a large portion of your company, meaning when you make money, they also make money.
Venture capitalists are investors who are willing to put forward a large sum of money in exchange for equity in the company, but who only get their money out once the business either is acquired by another company or goes public. VCs are professional investors that are all about the money. They normally look for investments that can provide a 6X return on their investment, so you better be prepared to go big!
- Lots of money.
- Other resources.
- Many entrepreneurs think that VC Funding is the key to their success.
- VCs can invest large sums at once and they can provide expertise and other assistance that is helpful in growing and exiting your business.
- Being VC funded brings instant credibility to your company.
- VCs open up doors to a vast network of individuals including partners and future investors.
- Look for larger opportunities that are a little bit more stable, meaning the company would need a strong team of people.
- Need to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.
- The term “Vulture Capitalist” exists for a reason. VCs are about the money and will take necessary steps to see a return on their investment, including ousting you from your own company.
- If the VC doesn’t think you have the skills and experience to grow the company, they will replace you.
- VCs may steer the business in a direction that you don’t agree with. However, they are very experienced.
Managing Partner, InEn Global LLP
CEO, Kent Investors Network