Start ups – Funding options & strategies

Meanwhile the founder may have invested a huge amount of their own time, money and sweat without any reward at that point. They may also have borrowed from family and friends and be in debt, but they are passionate and determined. There comes a time when they need to raise funds from investors to take the business to the next level. Easier said than done as many will know!

Pre-seed funding is an early funding round in which investors provide the start-up capital (up to $2 million) for product and or business development. It can be provided by loan but is generally raised in return for equity or shares in the company which may be offered at a discounted rate as an incentive to the investors. Pre seed funding occurs after angel investors and before Seed and Series A round and can follow funding from an angel investor (sometimes it’s the family and friends).

Astute investors are offered many opportunities and therefore gaining the attention of an investor is not easy. It is an “investor” market out there as many start-ups will know. An expression of interest by an investor is still a long way off from them putting money on the table and many investors will only invest on terms they dictate not the terms offered by a founder. Funding from family and friends has its own complications.

The irony is that despite the volume of investor funds in the market it is still very difficult for start-ups to secure pre seed and seed funding.

The options to raise funds are:

• Seed Funding—Seed funding helps to raise funds for things like market research, development, prototyping, and hiring and sourced;
• Angel investors- people or organizations who have the capital resources to assume risk in exchange for equity in the business.
• Series A Funding— Usually provided by venture capital (VC) firms or angel investors providing working capital for product development, hiring, and initial marketing.
• Series B Funding— to aid growth Series B funding can meet further working capital costs needed and often comes from the same source as Series A.
• Series C Funding— is usually provided by hedge funds or private equity(PE) firms through the sale of preference shares with the goal to prepare for public listing.

Many start-ups never get to Series B or C fundraising either due to the founder themselves or the business opportunity is seen as high-risk low reward low return.

The way funds are raised can be quite flexible, but it should be in a controlled manner and tailored to meet the financial needs and objectives of the company.

We have been assisting start-ups for over 30 years and this is what I have observed as stumbling blocks to attracting investors:

• The founder not wanting to relinquish equity and holding on to full power and control.
• The founder not putting up a viable financial and viable business plan with no supported data for example when will revenue start to flow? What are the short term and longer term projections? Are the projections “blue sky”?
• The founder is not clear as to how much they need and why. Where will those funds be allocated and used –No investor wants to put funds into a company to pay off old debt or to fund a founder’s wage.
• Over valuing the company – we see founders saying “Once I build the platform and it is ready to go live this company will be worth $10mill” – is that realistic? how has it been valued? What you may value the company at as opposed to an investor who only sees risk may be worlds apart.

• When you have a minimum viable product (MVP) that shows signs of traction in the market. It is the basic version of your product/ service refined through consumer feedback and market research.
• An MVP will make it more attractive to investors if you can also show there is demand in the market.
• You have a professional team behind you which includes financial and legal advice, marketing, and advisors with expertise and standing.
• At the pre-seed stage if you have a small customer base with revenue coming in with the potential for growth that will be attractive to investors, even pre commitments from customers can assist.
• Establishing a social media presence is a key.
• Prototypes of product allows the business to develop the techniques and processes for long-term production- does the product do what it is meant to do? Does it solve a problem? Is it new and novel?

Sometimes funding is required to bring on the right personnel with expertise needed so that the revenue will start to flow. Founders look at revenue, Investors look at profit!

Just as investors will do their due diligence on the founder and the business, the founder needs to be careful in selecting the investor they bring on board. Some investors will want to remain passive and just receive monthly reports while other investors (even if minority) will want to be more hands on involved in the business, not necessarily in management but more involved in decision making. Some investors are extremely anxious and risk averse and some more prepared to ride the wave and see what occurs. For the business it may be the investor can add value apart from money with their expertise and network and connections, so it is not just about their money. Finding the right investor is difficult and can take time.

• Angel investors— are individuals who may investment in the range of $25,000 to $100,000 and may increase their stake as the business develops.
• Accelerator or incubator programs— Early-stage companies raise initial pre-seed capital (typically over $100,000) in exchange for equity, which give the start-up access to a network of people, skills and networking opportunities with possible exposure to VCs for future funding rounds. There is usually an application process and a cost.
• Pre-seed and seed investment venture capital funds— VC funds can offer larger investments during pre-seed rounds but also have a longer decision-making process and usually want to take up greater equity and control.

It can come down to your own network so look around and talk to your accountant, lawyer and advisors and then target your efforts.

• If your start up is generating sales it will greatly increase your chances of securing pre-seed funding.
• If there are no sales, the task is far more difficult, and it may come down to who you know and your network of advisors.
• Investors want to see you have skin in the game and that you have invested a considerable amount of funds of your own and also sweat equity to get the business to that point.
• Investors generally invest if they are confident in you the founder and your personality and abilities.
• Get your team together, having a co-founder will increase your opportunity to find funders.
• Tell your story, your expertise and professional and academic qualifications relevant to the business as this may encourage investors.
• Ensure you have a NDA or confidentiality agreement in place to protect your IP before providing the access to your financial statements.
• Make sure you’re IM is professionally vetted before release and that you have available the 3 most basic documents that all investors will want to see that is:
a. profit and loss (or income) statement;
b. balance sheet, and
c. cash flow statements.

Less is more … most investors will want a high level 2 page pitch deck as a taster to see if they are interested before review of the more detailed IM which should cover:
• The problem you are solving and your solution;
• The estimated market size;
• Your product/ service offer, as opposed to your competition;
• Your corporate structure and business model;
• Your revenue and projected growth over the next 5 years;
• How you will grow your customer base over the next 5 years;
• The key milestones you are planning to achieve;
• If funds you are seeking and for what equity to achieve these goals.

The Pitch deck will not have detailed financial statements but will need some financial projections and modelling around revenue, costs that you can confidently share with potential investors.

Seek professional advice to have the best opportunity to get your start up off and running.