Start me up: how to find investment for your client's start-up
Author: Neil Dillon, Equity Manager, Swoop
There are many ways to peel a kiwi and even more ways to fund a start-up, but knowing which type of funding best suits your client's needs can be difficult. Perhaps they’ve got an idea but they need the money to make it a reality. Or maybe they’re running a new business that’s in a position to grow. Either way, you’re likely to be helping them make some crucial decisions that will no doubt determine whether your client's business succeeds – or not – especially if you’re dealing with the negative effects of the coronavirus pandemic.
Perhaps, like many entrepreneurs, your client has used their own savings to launch a business. In any case, they might now need to decide whether they’ll use their own money or someone else’s to drive their business forward. I want to help shed some light on some of the options available to you and your client. I’m focussing here on five stages of equity finance: bootstrapping, family and friends, angel investment , crowdfunding and venture capital. It’s important to note that some businesses might pass through all these stages in succession, while others might skip some stages – or may need only one type of funding to make their business work. If you’re looking at equity finance you’ll probably have decided against debt finance, which I’m not covering here.
Many entrepreneurs choose to go it alone. If your client is in this camp, they’re probably highly resourceful and haven’t been blinded by the bright lights of venture capital (VC). They might still seek VC funding at a later date but for now they’re happy to build their business using their own savings or early profits.
While this may not be the most glamorous route, it can feel very rewarding. There are many reasons for deciding to bootstrap your business, e.g.
- to maintain control of the business
- to wholly own the business
- because you can’t attract investors (e.g. if your business has a slow growth trajectory).
When you bootstrap, be prepared to:
- work from home or use co-working spaces
- watch those expenses
- do your own publicity
- oh, and watch those expenses!
Your client's growth curve will likely be much slower than if they had secured investment but, if they succeed, their struggles and challenges will all be worth it when they own 100% of the business and the profits are all theirs.
Family and friends round
Many founders will be lucky enough to have a strong network of family and friends on hand to lend moral support and advice – and if they’re really lucky, to put money into their business. This sort of raise is usually between £10,000 and £150,000.
Here are some top tips for your client to avoid any tears:
- Keep it professional and use proper documentation
No matter how close you are with your investors, money can complicate things. Be business-like when you pitch to family and friends. Tell them about your business model and let them be convinced by the merits of the business, rather than your personal need. If you remove emotion from the transaction there’s less likely to be resentment later. Documentation is a must, both for obvious legal reasons and to demonstrate to your investor(s) that this is a real commitment – it’s an exchange of money for equity in your company.
- Detail the risk involved
Your friends will want to help, but don’t let them get carried away with all the potential upside. Remind them that most start-ups fail – or at least don’t grow as much as initially hoped. Make them aware of the risks of their investment.
- Don’t dilute too much
It might seem like a good idea to give a good chunk of equity to your loved ones, but don’t dilute the ownership too much or it will prove very difficult to raise money via VCs or angels in later rounds. Like any win-win negotiation or transaction, both sides should feel they’ve got a good deal.
Business angels are usually high net worth individuals who have experience investing in early-stage businesses and may be entrepreneurs themselves. Angels are more motivated by a return on investment (compared to family and friends) but are usually knowledgeable about a specific industry and can provide valuable guidance – and contacts. Cheque sizes range from £10,000 to £250,000 but are typically £20,000 to £50,000.
Getting an audience with angels is notoriously difficult unless you have a lot of rich friends… If you don’t, spin your Rolodex to find out if any of your long distant cousins are investing moguls! Or start with some well-connected friends who move in the right circles. Like it or not, it’s who you know…
Your client will need to think about getting in front of angel networks (syndicates). These are usually made up of ten or more angels and they write cheques between £100,000 to £500,000. It can be difficult to get an introduction to these networks, not least because they see a lot of deal flow. It helps to have a sparkling pitch deck so that when an angel lays eyes on it he/she can quickly understand your client's business and the potential, and feel greater confidence in the business proposition. In other words, be investor ready.
Swoop comes in handy at the angel stage (and at all stages for that matter). Our team can review your client's pitch deck and help them improve it. Once they’re investor ready we can get their pitch deck in front of the right angels (and VCs). When it comes to angels it’s a numbers game, but you need to find the right type of investor for your business – the right match. If you register with us, our technology can match your client with current investors who are most likely to have an interest in their business. Our team of well-connected advisors take it from there.
Make sure you make it easy for investors to take advantage of any tax breaks. In the UK, the vast majority of angels will invest under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). Your client should apply to HMRC for advanced assurance before they make any approaches to angels or VCs.
Popularised in the US, crowdfunding is a great way to get traction and publicity in the market while also raising funds for your client's business. Read more about crowdfunding in our Knowledge Hub. Crowdfunding is big business and there are a number of players that can help your client find investors.
Venture capital (VC) round
Some entrepreneurs see venture capital as the ‘holy grail’ of funding. For others, it signals the end of their control of the business. However you see it, there’s no denying that venture capital provides funding, guidance and a whole host of other benefits that can rocket your client's business from product-market fit to profitable growth!
There are many VC firms out there and it can be difficult to find out their investment strategy. Some entrepreneurs have the right connections, but if you don’t, you can spend a lot of time trying to meet VCs – this is time away from focusing on creating a viable business. As with angels, crowdfunding and indeed all equity finance, Swoop can help your client find an alternative to going it alone. We can introduce you to the right potential VCs for your business.
Here are some top tips before reaching out to VCs:
- Prepare a pitch (see angels section above).
- Understand your finances and be able to justify your unit economics and financial projections.
- Make sure you have product-market fit (i.e. your product satisfies a strong market demand.)
- Get EIS/SEIS advanced assurance (i.e. provisional indication from HMRC that you’ll be able to apply for tax relief for your VC investors).
- Get to know the VCs and choose wisely – when you accept an offer of investment you’re not looking just for money but rather a partnership that will shape your business for several years.
There we have it, the many ways to get your client's start-up funded if they’ve decided that equity finance suits their needs more than debt finance. None of these options is particularly accessible but you knew it wasn’t going to be easy!
To quote Tom Hanks (as Jimmy Duggan) in the 1992 movie A League of Their Own, “It’s supposed to be hard. If it were easy, everyone would do it”.
If you’d like to Swoop to help your client access equity funding, register with us online or call us on 0203 514 3044.