David Battey has spent the last 4 years working not just in operational roles within young businesses sourcing capital, but also with investors assessing the quality and clarity of business plans and investment opportunities. He’s a director at Lumaca Capital, which was set up specifically to focus on supporting young businesses looking to scale.
Here, David Battey gives his six key pieces of advice for small businesses trying to raise finance, originally published on his blog.
Firstly, while it’s clear that raising funds is undoubtedly one of the most challenging priorities for any Founder, David identifies three main reasons why early-stage companies typically struggle the most with their first £500k-£1m raise.
- Start-up funding is relatively easy to raise. It’s available through grants, friends and family, networks, SEIS incentives etc., so as a result the number of businesses entering the £500k-£1m funding range is far larger than the availability of capital. The competition is stiff, and investors will carefully question your application.
- Investors in this range are typically high net worth individuals, a variety of syndicates, small family offices and small VCs. Each of these have different approaches to investment. Most institutions do not consider this range due to the economics of doing so, allied to their appetite for risk. This means the majority of capital in this space is more discretionary in nature, with no real pressure to invest due to fund investment periods.
- Funding is a time-intensive process. In most cases you’ll be rounding up multiple investors, negotiating individually or as a block. Be clear on funding timetables that work for you when you set out, but allow for slippage. Go to market in a position of relative strength: if you are desperate for cash then investors will take advantage.
So in order to navigate these hurdles, what should you keep in mind when going to market looking for a fundraising between £500k-£1m?
1. Raise more than you think you need
Simply put, it’s very easy to underestimate operational and commercial costs. Not because of poor planning, but because it’s important to allow yourself to make mistakes. When calculating the capital you require, you need to take into account cash flow needs, staffing challenges and underwhelming revenues.
David advises resisting “the urge to forecast immediate large scale spend as you will most likely not deliver the value you expect prior to your next round. Sophisticated investors will find this more credible.”
2. Raise for the next raise
When going to market, keep in mind that the current fundraising should put you in a good position to start the next one. Of course, this is easier said than done, especially at the earliest stages when the day-to-day hustle tends to keep you from thinking about future plans. But it’s important to be prepared to speak to investors who might potentially come on board a year later. This will provide guidelines for your business to grow in the right direction for investors to be able to bet on it.
3. Valuations matter
Investors will challenge your valuation. Be prepared to support it using the key strengths of your business model, such as scalability. Don’t reference crowdfunding site valuations unless those are what you are using to raise finance.
Don’t hesitate to talk about future funding rounds that you’re planning either, and about how you plan to build value and de-risk your new investors.
4. Selective circulation beats wide distribution
“Treat your deck as you would any company asset (IP, product recipe, commercial agreement).”
Investing in your company should feel like an opportunity that is given to the few, not the many. Otherwise you’ll end up devaluing your own company’s worth. Avoid sending pitch decks too early in investment talks, and reserve them for a few selected parties.
5. Timing is everything
Investment, in many ways, is ‘seasonal’, so plan your round according to the year. March (pre-tax year-end), July (pre-summer) and November (pre-Christmas) should be avoided. Especially if you’re at a stage where investment is likely to come from high net worth individuals, plan your round taking into account holiday periods and personal circumstances.
As a general rule, also keep up to date with political climate, industry changes and other external factors, and always evaluate the impact these may have on your business, sector and funding round.
6. If you don’t have the expertise, find someone who does
Corporate finance skills/knowledge and the ability to innovate, create a product and run a business rarely coexist within the same individual. Fundraising requires a very different skillset from that of a good entrepreneur, so there’s nothing wrong with looking for recommendations from trusted advisors.
Lumaca Capital was set up specifically to focus on supporting young businesses looking to scale. If you would like some advice about your funding strategy or are looking for investment, please do not hesitate to contact David Battey (firstname.lastname@example.org).