Lots of great blogs and websites are out there already, covering the capital raising exercise each new company has to go through, so I won’t go into this in minute detail. However, for what it’s worth, here’s my experience of raising money (on previous startups).
There are several ways you can do it, the main ones being: Private money, Banks, Angel Investors, Venture Capital and Private Equity.
Private Money
This is obviously great, if you’re in the situation where you can go down this route. Either your own cash, or a good friend or relative. My only advice here, is make sure you have a good written agreement, if the funds are being put in by relatives or friends. It’s tempting to wing it, but this has led to big problems later on for me in the past.
Banks
Banks in this country don’t tend to make speculative investments in startups, unless there are exceptional circumstances surrounding the business or team. Banks will lend startups on a secured basis. This tends to mean you provide shares, bonds, or a house as security. If you don’t have security, it’s worth looking at the Small Firms Loan Guarantee scheme, which is effectively a DTI back loan from the bank. The banks all subscribe, but don’t tend to tell you about this, as the government fixes the interest they can charge!, although it’s been a while since I’ve looked into this.
I’ve used secured facilities with the banks for just about every business I’ve been involved with. The biggest trick to getting banks on your side is to keep them in the loop and make sure they realise you are good at running the cash flow of your business (more on this in a later post).
Angel Investors
I’ve been very lucky on this front, and had a brilliant relationship with several private investors in the past. So much of this is about the chemistry between you and the investor. It’s very tempting to take money from the first person that offers it, but this can lead to big problems down the line. My advice:
- Never give control (i.e more than 50%) of the equity, unless you have no other choice
- Try and pick an investor who can help the business in other ways (contacts, advice, experience, etc)
- Be 100% sure that you know your plan inside out (twice!) before you approach anyone, you should be able to pull any figure they want from memory.
- Be very clear about how they will make a return on their investment. As an average, most private investors want a 10x return on their money.
- Be as clear as you can about the risks to their investment and discuss these at the outset.
- Try very hard to ensure that the investor can’t sell their equity to a 3rd party, unless it’s an agreed exit strategy.
- Don’t over exaggerate your performance figures. It will come back to bite you.
My first business venture was backed by a private investor. It was a total disaster and nearly wiped me out completely. My investor lost his money. But, I’d been honest all the way through and kept him in the loop, asking his advice on various issues that came up. As a result, he invested money in my next business.
Venture Capital & Private Equity
I’ve not had direct experience of this. VC firms tend to look for technology companies that will carve out a new niche, via new technology that can be protected.
They invest in management teams as much as the idea itself and tend to take a large percentage of the company for their involvement. Most VC firms tend to have a minimum investment criteria of around £1M or higher. There is a growing trend towards funds that specialise in smaller investments for startup or very early stage companies, which I think is great. I can’t comment on strategies for getting venture funding, as I’ve never done it. Private Equity is largely the same scenario, often for larger sums again.
In our case, the webtogs project was being 100% privately funded. The biggest decision was how much of a gamble do we take. After much thought and discussion, we decided to expand the launch offering into camping and walking. We set the budget for Webtogs at £100,000.00, with the possibility of further investment, once the site was live and sales were coming in.
Tags: View Comments
