We speak to Richard Allan, the co-founder of funding partner, CapitalBean.com, to get an insight into how to get your business ready for a funding drive or funding round.
Funding is a challenging and often all-encompassing task. It’s critical for most companies, especially those in their more junior years. Without raising funds, most companies that exist today would not be in operation. Funding provides the fire power for companies to grow. It could be initial funding to launch a company from ideation to first iteration of their product or survive. Equally, there could be additional funding required to operate and grow. Without it most start-ups would cease to operate.
Often not enough time is spent getting a business ready for funding. First and foremost you should know exactly how much money you need to raise and precisely what the funding will be used for. It’s a big red flag to prospect investors if you don’t know this. Some founders will provide a range e.g. £500,00 – 750,000. The range communicates that you’re unclear on exactly how much funding the business actually needs to be successful over the next period. It’s not a good look to prospect investors.
One of the most frequent rebuttals when rejecting a company for funding is that the plan for spending the funds lacked depth and clarity. As a company seeking funds, you should have a precise breakdown of exactly what said funds will be used for to propel the company forward. You need to show investors you know exactly what needs to be done with the funds to drive growth.
Having a detailed financial model reflecting these details is key. Know exactly what will be budgeted for marketing, salaries, technology etc. The financial model should also reflect revenue projections as well as a breakdown of expected profit and loss.
As well as having a financial model, it’s important to be pitch deck ready before soliciting investments. The pitch deck should tell the story of your company in a clear and compelling manner. It should include; the problem, the opportunity, market size, your solution, competitors, your traction, milestones and future road map (product improvements, marketing, sales, hiring etc.).
Funding is not a game for the weak of heart. Expect to hear no a lot. Make sure to learn from every no and calibrate pitch based on the feedback you’re getting. Since funding can be so time consuming, it is probably something that you should always be doing or thinking about in some capacity. It’s a smart strategy to be consistently building relationships within the funding community.
What Type of Funding is Best for You?
There are multiple avenues that exist for funding and knowing which to choose best for your company is important. The most popular types of funding include
Crowdfunding: this is when you derive funds from multiple different individuals usually in smaller ticket sizes. Leveraging hundreds to thousands of micro investments can quickly mount. These investment ticket sizes could start at as low as £100, with no limit on the maximum individual investment (£10,000 would however be considered large). Each individual investor will get a small ownership of the company dependent on valuation and their individual investment. Crowdfunding is a quick hack to getting visibility. Due to the volume of individuals investing the company can occasionally go viral. It’s often used by companies who are looking to get more PR and eyeballs on their company. Peloton, the connected fitness company worth billions funded their first round in this manner.
Angel Investing: investments made by wealthy individuals who take larger ticket sizes. The average ticket size would be £25,000 and it’s not uncommon for angel investors to make investments in the millions. Angels are often actively involved in helping guide the companies they invest in. They can provide valuable advice and make valuable introductions within their network. Finding an experienced angel with domain expertise in your industry can be of immense value.
Venture capital: funding obtained from funds who are specifically in operation to invest in companies. Venture capital firms fund at all stages of the deal cycle all the way from company inception (pre-seed) to late stage hyper growth companies (think Uber pre-IPO). Venture capital funds can front big checks , often capable of funding your entire round. Venture capital funds can invest anywhere from £200k to hundreds of millions. These funds need to see a return on their investment which can put immense pressure on your business.
Debt financing: if you own an asset of value such as your home, you can use this to gain funding. What you can borrow will depend on how much of the asset you own. Often lenders will allow you to borrow up to 80% of the equity (total amount you own) within your house. There is no reward without risk however. If you fail to service the loan i.e the investment within your own business fails you could lose the asset ((in many cases people’s homes).) put up as collateral for the loan
Using your recurring revenue: a newer funding model is using your company’s recurring monthly revenue to receive funding. In exchange for your future recurring revenue, you can receive up-front capital. The advantage of this type of funding is there is no dilution to your stock ownership. This type of funding however, is only available to companies with sizable and predictable monthly income streams.