The following is excerpted from “Investor Ready,” courtesy of Julie Barber, CEO of Spark! Consulting www.areyouinvestorready.co.uk
Before you dive into planning your investment approach, there are some important things to think about.
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Do you really need investment?
You may well reply, “Of course I do, that’s why I’m reading this,” but it’s worth challenging yourself on this one. Investment isn’t an easy path – it brings with it a host of costs and impacts for your company, as well as potential personal impacts on you as founder.
Raising money gets easier the more traction you have – and that requires a strong product or service backed up by social proof and/or paying customers. A common mistake I see among startups is that the founder tries to build the company too big, too early, and consequently they assume they need lots of money.
If you engage with your customers and understand what would be a minimum viable product (MVP) for them (the smallest version of what you want to create that they would pay for), you can build the MVP at a low cost and start generating revenue while you improve and expand your product.
This applies whether you run a tech company developing an app or a drinks company that wants to launch a new range. The tech company only needs to build an app that is usable, not one that is perfect. The drinks company needs to create one drink, not the whole range, to get it off the ground.
If you can keep the costs low, you may be able to leverage your own savings or money from friends and family to help you get to a stage where either you’re generating profit and can bootstrap, or you have a much more compelling case for investment.
Whether you need investment is also massively dependent on your ambition and your business model – a multi-continent rollout with asset purchases thrown in, like Uber, isn’t going to happen without serious investment. On the other hand, a simple but clever bit of tech that can support customers from an early stage is possible with bootstrapping.
If you have already got customers, it’s about understanding why you need money to get more. If you need a massive capital injection to make your product scalable, then investment makes absolute sense. If your product works fine as it is, and you just need to generate more sales, a grant or a loan to help you hire an amazing salesperson who immediately pays back their worth could be a better way to go.
Nic Brisbourne, managing partner at Forward Partners, an early-stage venture capital fund (VC) and startup studio, explains what directions he might take and why:
“It’s all about the scale of your ambition and how much capital you need to get there. Capital investment only makes sense for the small percentage of businesses that need capital to fuel rapid growth. Startups that fall into this bracket have a need or desire to outpace the competition and take the market. If this isn’t your situation, then you’re probably better off bootstrapping.”
Some founders hate the thought of “giving away” equity and want total control.
Shaun Hyland, from Reach Commercial Finance, has experience of founders not taking investment when they should have:
“Owning 100 percent of a business worth £1 million is probably not quite as good as owning 50 percent of one that’s worth £100 million. A good equity investor often – pretty much always – brings a lot more to the table than just money. A lender brings money and that’s it. If a lot of founders that I see had taken equity investment when they could have done, it would have accelerated the development of their business and made them prime movers in a fledgling industry. Many people just go for the slow and steady approach which a lender provides, and as a result, they miss the boat.”
The critical question is whether investment is the right route for your business at this time. As Nic identifies, if you do take investment, make sure it’s the right kind of investment to match your company’s goals.
Your availability to run a raise
Any startup or scale-up founder is likely to tell you they work all the hours under the sun – and that’s just on running the company. Raising investment can take a lot of time, and understanding the impact that can have is critical.
Deborah Lygonis, founder of Friendbase, an online world game aimed at teenagers, shared her frustration on the time it takes:
“I feel that I’ve spent so much time trying to raise money, I’m neglecting the actual business, so that part is really frustrating. I know it’s nothing unique, but I sometimes feel like a broken record when I’m sitting at meetings while I could be spending my time doing something so much more productive. It’s one of those things you just have to get through, but it’s extremely time consuming. A lot of people when they start raising funds don’t realize how much time they actually have to spend on it.”
Heather McDonald, founder and CEO of WooHa Brewing Company, recommends delegating what you can to free up your time:
“There’s nothing that can prepare you for your first raise. I think most entrepreneurs when they’re starting out think that they have the most fantastic idea and the answers to all of the questions, so what could possibly go wrong? What have they not planned for?
When you do your first raise, even if you have a fantastic idea and plan, it’s a lot of hard work to actually convey that to people. They don’t necessarily understand where you’re coming from or your motivations. The first thing you learn when you do a raise is how hard it is. It’s a 24-hour job, and you need to be switched on and concentrating, so offload as much non-raise work as possible to ensure you’re not distracted from it.”
It isn’t just about making time for the raise, though, as Jonathan Lerner, managing director of Smedvig Capital, explains:
“Fundraising is a very time-consuming process. You have to have the time for it. You can’t let the wheels fall off the bus, so the business has to be able to trade effectively without your full-time input. Don’t miss your numbers during the process. That’s really important.”
The ideal situation is to have a co-founder so one of you can run the business and the other can run the raise. If you don’t have that option, or you don’t yet have staff you can delegate to, you’re going to need to make some tough decisions about what is a must have and what’s just a nice to have in the business while the raise is happening.
The long-term impact on your business
One last thing to consider before you step into raising investment is what it will mean down the road for your company, and for you as founder and CEO. Investment usually brings with it a level of oversight, including board members. Their expertise can obviously be beneficial, but it can create a pressure-cooker environment where you as CEO really start to feel the weight of investors’ expectations.
It also means additional time and admin overheads – board reports, shareholder reports and, of course, board meetings. Board meetings themselves aren’t a negative – by their nature, they’re an asset to a company – but be aware of the time they’ll take up and how your role needs to change to accommodate them.
Then there’s a slightly less pleasant potential impact for founders. If investors hold a significant enough stake, they can at some point in the future decide to remove you as CEO and bring in someone more experienced to take the company through the next stages of its life.
It isn’t all doom and gloom, though. Apart from getting the money, there’s another great upside to raising investment. Companies that are under the “investment microscope” are usually stronger. They do things properly and have better plans for the future.
You should now have a good idea of some of the key impacts of raising investment, both during the exercise and afterward. If you only take away one thing from this, make it a knowledge of how much forward thinking and planning you need to do to make your raise a success.
“Investor Ready: The Guide for Start-ups on Getting Investors to Say Yes” is available now wherever books are sold and can be purchased via StartupNation.com.