Sources of start-up funding

By: Chris Barling

Date: 8 January 2010

Back in the mid-1990s, my company, SellerDeck, was set up using my own money and some I borrowed from family and friends. My business partner and I then raised £165k from an angel investor, and later a further £1.5m from venture capitalists, 3i.

At the height of the dot-com boom in 2000, we went public on the London Stock Exchange, raising £25m. A couple of years later, the company de-listed and became a limited entity again.

When you are seeking funds, you won't feel it, but there is plenty of money around. You just need the right formula to tap into. So it's important to understand the keys to attracting investment – particularly from business angels and venture capitalists.

The challenge is that investors – just like those on Dragon's Den – receive numerous approaches, but make few investments. How can you make yourself stand out, and get the cash you need to grow?

I’m assuming that you have a workable business, and a well-written plan that covers finance and marketing without boring too much with detail. However, even when you have these, you still have a long way to go.

There are three keys:

  • You must excite investors with the chance to make a lot of money.
  • You must convince them that the risk is low.
  • You must explain how they will get their profits out. This is what they care about. Get it right and the cash will follow.

Incidentally, the way to generate excitement is to provide hard data on the size of market you can address and what margin you can obtain. This must be evidence backed. Simply saying: “we estimate the market at £100m and will take 70% share” without any facts to back it up is a real turn off. But don’t go into too much detail.

Once there is an initial attraction, the key questions will be about the credibility and commitment of the management team and business generally.

The best answer to is to have a great track record. If you don't, get people involved who do and get experienced people onto your board. This will have a cost, probably in shares. You also need to listen to their advice – no one who is good will stick around if they are ignored.

Investors will also want to be certain of your commitment. Don’t mention any alternative business ideas, because this will be a big turn off. If they put their money in, they want you to be fully devoted to making it grow, becoming profitable as soon as possible.

The next question is whether the business itself is credible. This is best demonstrated by having real sales and customers. In fact, if you don't already have these, you need to ask yourself some tough questions.

Investors will sometimes ask you to put your house on the line. Personally, I’ve always refused, arguing that I had already taken a pay cut to start the business, risked my career and was utterly committed anyway. Finally, I pointed out that such a high price runs the risk of the directors behaving desperately if things get tough – which doesn't promote good business practice or the protection of their investment. I’d suggest you sharpen these arguments up, too.

Many people obtain their investment from family and friends. Assuming you know people with sufficient capital, this has the advantage that it’s easier to tap them. The disadvantage is that if the business fails, which is bad enough, you may also face losing key relationships. And I'm afraid to say that if you believe there is no chance of that happening, you probably don't understand risk and should reconsider your career direction.

I myself borrowed money from family and friends to help get the business going. But I deliberately took the loans on personally, so if the business failed I’d still have to pay them back. And I kept the loans at a level that I would just about be able to pay them off over a few years.

Finding potential sources is the easy part. You can find a list of angel investor organisations at www.bbaa.org.uk, while VCs can be found at www.bvca.co.uk.

Remember, the key lesson is to look firstly at the needs of investors. Only secondly present your need for money and how much sense the business makes to you.

I can’t pretend raising money is simple, and a pre-requisite is having a viable business and plan anyway. We presented to more than 70 investors before getting our first funds. However, if you follow the advice here, your chances will be improved. Good luck.

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