Strong founders, a credible team, track record, great ideas, something novel, money already coming in…? What is it that really drives investors to select one investment opportunity over others?
And how does this align with what you should be looking for in your investor(s)?
We explore these questions, together with one of our own Farillio investors, and a few other investor-savvy friends.
1. How should you approach getting investment? Top tips from investors
Independent financial services expert, Tarne Bevan, who is a seasoned startup mentor and investor, advises that the best way for any startup or small business to approach this question is in two parts: looking firstly at how to approach getting investment (which is about your credibility, doing your homework, having a great idea, etc) and secondly, considering what type of investor you want – and that’s going to dependent on your product, proposition and industry, the type of funding that you want/need and where you want to be in a few years’ time.
Getting investment – what should your approach be?
Tarne advises that here, you should be focusing on the what? Why? How? questions.
“Think in terms of Simon Sinek’s ‘golden circle’ and the ‘why’ you do what you do,” she suggests. “You need to be able to explain this credibly, have done your homework, including identifying some of the challenges you might face, acknowledge what you don’t know, but how you’re going to find out, and you must be able to reel off the important numbers.
“This is about your business plan development. Business plans are not just for showing people when you need funding, their most important benefit is taking you through the forced discipline of examining and answering critical questions, the answers to which will underpin your commercial and fundraising success.
“These are questions such as: who are your customers? How are you going to attract them and persuade them to buy your product or service? How will your competitors affect your customers’ decision-making? How are you going to be distinctive – and more persuasive?
“If you already have the answers to these questions, then try looking at them with an objective set of eyes, to make sure you can answer them credibly. Test your answers on others – especially those likely to be more sceptical, and those who know your market well.”
Tarne emphasises that founders and management teams need to be well-prepared and very honest with themselves, from the outset. Those who will fail at this hurdle are those who, she says, don’t solicit and take feedback (and consequently miss things that they did not know), and those who surround themselves with the wrong people, (including people that always agree with them, whose thinking is therefore not challenged when it should be).
Getting investors – what you should be covering off
The second part of the question focuses on what sort of funding, and therefore investors, you need.
“This is going to be very dependent on what stage your company and product/service are at, what your network is like, whether you’ve you run a business before, what industry you’re in, and what your longer term objectives are as a founder/co-founders,” Tarne says, reeling off her essential list of what you should be ticking off.
“For example,” she explains, “if you’re already generating revenue, then you’re likely to be able to access some more serious types of VC investors, but they’re going to be a lot tougher on you, because they’ll expect to get a clear return on their exit from your business at some clearly defined point in the future, and they might want a pretty big cut of the business to justify the risk they’re taking on you.
“Conversely, if you’ve only got an idea, and not a lot of capital of your own to put up, then crowdfunding might be a good first option, or you could consider the friends and family investors route too,” she pauses and warns, however, “friends and family can put emotional pressure on founders, who don’t want to let their loved ones down. That can be a positive motivator, but only if it drives the right decision-making by the founder. This group may not always be the best source of good business advice that is relevant to the business in question.”
Crowdfunding means you may end up with a lot of small-holding shareholders, depending on what platform you use. They can be hard to manage without a nominee shareholder arrangement, which the main crowdfunding platforms often use, channelling their investor through one representative, shareholding body.
It can be a good route to market and a good means of testing demand and support for what you’re creating, some businesses even see it as a great additional strand to their PR and marketing efforts, but even this route has some down-sides too. “Go into it with your eyes wide open,” Tarne says, “and always read the small print around what you’re committing yourself to, once the money is raised. Be especially wary of future exclusivity requirements any other limitations on your future freedom to fundraise differently.”
Tarne also offers with some good advice about not seeing all money offered as good money. “Of course, it may seem tempting to take any offer of funding,” she acknowledges, “but it’s worth thinking seriously about how much, as founders, you really want to give up, bearing in mind that the most expensive dilution for you will be in the early stages of your business….Sure it might not seem much at the time – and you may have no choice ultimately, but if you’re successful, what you’ve given away in the early stages will make a huge difference further down the line when the numbers and your growth prospects are a lot bigger.”
She concludes with a helpful suggestion about being clear on what you want from the investors that you target.
“Think about what benefit having certain investors on board will bring to your business; contacts, specific knowledge or experience, a pragmatic sounding board..” These are all important features that a good investor relationship with the right investor(s) can bring. And they may be all the more valuable for sole founders. ”Being a sole founder can be pretty lonely at times,” she points out, “less so if there are co-founders around to bounce ideas off. Investors are not just about the money, now and maybe later on too. Great investors will be there to help you make it work – so harness what they can offer.”
We asked Tarne a series of further questions based on what we and our small business community wish we’d known when we were starting out – and in some cases – still want to know. Here’s what she shared with us.
2. What do you see as the typical paths for startups when it comes to funding?
Is there even a typical path?
“The answer to this is ‘it depends’!” Tarne told us. “That isn’t intended to be an unhelpful comment, but the nature of the funding, the type of investors and the timing of funding will all depend on the stage of the company, the maturity of the idea or product, what type of product it is and how much capital you already have in the business.
“Take a biotech product – it could take years to be developed. The investors in this type of business would be very specialised and likely have a longer outlook and greater patience than say a software company that basically only has a ‘minimum viable product’ (a.k.a. ‘wish list’) of what is planned in the build.
“But the mistake some people make is only planning for what they need on the build, not accounting enough for mistakes in the build, testing times and the usual delays. They may not plan in their funding needs enough to actually get the product in front of people and to sit out the sales lead times of some industries.
“Fintech companies often underestimate the time it takes in a bank, and the hoops that need to be jumped through to get a deal closed out. It can take months, and in the meantime, you’re not focussing on other opportunities.
“Access to an accelerator or syndicate can be a good ‘leg-up’ in getting funding nailed. Not only will you have access to a lot of mentors, contacts and potential investors, they’ll also do some of the work in attracting those investors, which can only be beneficial and welcome!
“The type of funding you might need could also vary depending on where you’re at. Equity (shares) is the most common form, but depending on my previous points, you might look at shares with a different class of attributes, preference shares, convertible bonds (which may have interest payable), or perhaps not equity at all, but bank debt or other debt financing options. Each have their pros and cons.
“Having said that, it’s likely that unless you’re earning revenue, equity (with perhaps a bit of bank debt (such as the money offered under the government’s startup loans scheme) is your only option in the beginning. But again, don’t rush headlong into this without looking at the consequences: how much of your company will you be prepared to give up in return for how much funding?”
3. Sole founder vs co-founders: how important are co-founders to the attractiveness of an investment opportunity?
We’ve come across some organisations who make clear that they only like to invest in businesses with co-founders, rather than sole founders. Do you believe sole founders are at a disadvantage when it comes to fundraising? Is this something that you consider important to your investment decisions?
“The fundamental factors exist regardless of whether there’s an individual, or co-founders, involved: they must have credibility, professionalism, integrity, know enough about the industry/client base they are looking to build for/sell to. They need to know their numbers, be realistic in how they plan, and be willing to stay engaged with investors,” Tarne points out.
“Where the sole vs co-founders consideration becomes more a significant factor is when, as an investor, you’re looking at the balance of skills needed to make the business work, and whether you have this with one sole founder, and indeed, whether between co-founders, each brings something different to the table, but in combination, they’re able to come to agreement on the things that matter.
“With co-founders, their individual circumstances and expectations also matter, i.e. if you have one who wants to just get bought out in 5 years vs someone who wants to build a business to work in and own for the longer term, then this can flag up potential issues that investors will want to probe and be confident won’t hold the business back or distract those who are building and managing it.
“You might be surprised by this, but in my experience, the earnings needs of each also matter. If one has a lot of capital behind them and can survive without income (or very little income), but the other doesn’t, then that creates a tension that won’t be good from an investor’s perspective. You want this management team to be taking decisions in the best interests of the business, to be hungry to get to market and generate money, for sure, but not at the cost of doing the right testing, putting in the essential groundwork and making the right quality assessments.”
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