“Only 0.05% of startups raise venture capital” (Entrepreneur). The market is notoriously difficult for start ups but can be equally challenging for scaling and venture stage businesses. The risks of getting it wrong are not just that you don’t raise enough funds but also include giving away too much equity, incurring high investor costs or relying on an investor who is unsupportive. To minimise these risks our top ten tips of raising funds for scale ups and venture stage businesses are:
- Have a minimum variable product (‘MVP’): It might not be finished but having evidence of traction and a clear route to market is a tremendous advantage. A working MVP does not need to be the final vision but it should be a commercially viable product.
- Don’t go too early: Investors will want to see market validation normally through sales and a proven ability to cut through to target clients (to make them switch behaviour to make a purchase). The market validation not only demonstrates that there is demand but also that the management team can effectively articulate their brand and offering to reach target customers.
- Get a good deck: There are plenty of online resources to help develop a pitch. National campaigns like The Pitch provide great opportunities to practise and get feedback from investors and seasoned advisers. In addition, many universities have accelerator programs (like SetSquared) and there may also be regional forums like the excellent Investment Activator Programme in the South West.
- Be market savvy: The opportunities for investment and exit will vary by sector. For investment, this might mean accessing industry-specific opportunities (for example there are several unique opportunities available to Creative businesses) or valuation methodologies (such as SAAS models). In addition, investors are likely to be interested to understand your market insights and approach to providing them with an exit with a good return on investment.
- Make use of venture capital schemes such as SEIS and EIS: These incentives provide investors with tax relief on the initial investment and also any losses. Getting pre approval is not an expensive exercise and can be a prerequisite for many investors. For further information about these schemes and on how to avoid common pitfalls you can read our articles SEIS and EIS Pitfalls and Ongoing risks for venture capital reliefs such as EIS.
- Build a strong list of potential investors: Very early stage investors will look to friends and family and beyond that will need to develop their own network of potential investors (which may be sourced through their sector or local region). In addition there are resources such as https://www.landscape.vc/ (which is free) or paid for models like https://www.connectd.co/. Advisers can also help navigate this ecosystem, connect with their wider networks, reach active investors in the sector or specific funds that may be relevant to you, like the excellent Astia that invests in high-growth companies with women leaders. Allow lots of time for this so start early and incorporate it into your broader network efforts.
- Have a back up plan: Raising funds from an investor may be the acceleration you seek but it does not need to be the be all and end all. Many businesses struggle at first to raise funds but go on to be extremely successful at a later stage, so have a plan B and a plan C. See our article Funding growth without investment for more pointers.
- Advisers: The founding team needs good advisers who have experience in scaling, obtaining investment and exiting. Having a credible adviser not only reflects well to potential investors on the business but also managements’ receptiveness to receive help and support to tackle issues as the business grows. Experienced and credible advisors will often provide a level of pro bono advice and not expect to dip into your equity.
- Finance: Not everyone gets finance easily, so having expertise to call on to help can be critical. The financial management requirements of an early stage business can be limited and knowing how and when to scale financial and business management will not only help you make better decisions and avoid unnecessarily worrying but also provide a source of confidence for investors.
How we can help: We work with scale up and venture stage businesses providing financial management tax, corporate finance and scale up support (business development, HR, IT), applying our professional and commercial experience. We provide clear and practical solutions from advisers who are experienced entrepreneurs, board advisers and professionals. If you need help with your scale up tax planning or any other aspect of successfully scaling your business, do contact us for a free and confidential initial consultation.