Every business needs investment. Whether you’re starting out, looking to grow or ready for serious expansion, you need money. But where does it come from, how do you convince people to back you, and when is the right time to ask?
Getting started
Friends and family are often the first source of finance for entrepreneurs and business founders when their venture is just an idea. At this stage it’s unlikely you have evidence to demonstrate your business plan will be successful. Approach people who might back you as an individual, so you can launch your idea and take it to the next level.
Toby Kress, head of London Metropolitan University’s Accelerator business incubator, says starting up is not expensive. “It doesn’t take much money to put something up online, build a minimal viable product and get feedback on it,” he says.
Once you have something tangible, Kress suggests entrepreneurs move onto a seed round to turn the idea into a business. Before deciding what sort of investment to go for, he advises considering the end goal. “Entrepreneurs are looking for two things – to have control over their own destiny and to make a lot of money,” he suggests. “Be clear which you want to do. If it’s all about having control, you won’t want to scale quickly and you’ll prefer to keep control of the equity. If your ambition is to grow the company, sell it and make enough money to do something else, control doesn’t matter to you.”
Turning to the public
One form of raising seed capital is through crowdfunding, which enables people to win investment from a large number of people online. Luke Lang, co-founder of crowdfunding website CrowdCube, says this approach is perfect for early-stage businesses. “Crowdfunding allows friends and family investing to really explode,” he says. “Startups can reach out to their broader community on social media or their existing customer base.”
Investors can inject any amount from £10 upwards. This form of equity investment means business owners give up a stake and larger investors will have a say in future decisions.
CrowdCube approves entrepreneurs before listing them on the site. “Only 25% of businesses that apply make it,” says Lang. “The types of businesses we’re looking to fund are high-growth, high-opportunity.” He adds that successful applicants make compelling pitches and plan how to promote the bid to their networks.
Branching out: angels and bankers
Another source of early investment is angel investors. Such private funders are commonly accessed through personal introductions, or via the UK’s 250 angel investment groups listed by the British Business Angels Association. Entrepreneur and angel investor Sherry Coutu advises business founders to pitch to angels who they know will be interested in their market area. “You want smart money that believes in what you’re trying to do, then it’s likely to go further,” she says.
Coutu has invested in more than 50 companies and bases her decisions on the team rather than the business idea. “Ideas are worth very little but the ability to execute is really important,” she says. It’s common for angels to syndicate when they invest and place an angel on the company board. They also provide advice and guidance to develop the company.
Alternatives to equity are loans from banks or finance institutions such as credit unions and Community Development Financial Associations, and grants such as a government start-up loan. Federation of Small Businesses policy chairman Mike Cherry says when meeting potential investors for the first time it is vital that entrepreneurs have good financial awareness, check their credit history and show they can answer any financial questions. “Your cashflow forecast is absolutely crucial,” he advises. “You also need to be aware of the competition and understand your market.”
Cherry also advises business founders to ask for enough money. “Sometimes people are reluctant to ask for more than you think you need, but if it’s an early startup, don’t underestimate,” he says. He recommends they research the Business Banking Insight portal, which lists 5,000 potential investors rated by people who have already won funding.
Getting the timing right
Knowing when to approach investors for money can be tricky, but there’s nothing to lose from trying. Santander SME Banking managing director Marcelino Castrillo says if an entrepreneur comes to him without the right offer, he often provides alternatives. “For example, we can point you to our partner company Funding Circle,” he suggests.
Castrillo says the strongest applicants arrive at a meeting with a three-page business case. The first explains why the business is unique, the second how cash will flow in and out, and the third describes what might go wrong and how to fix problems. “This is most important,” he says. “Be a totally open book. It doesn’t scare the banks away – it shows you know your business.”
One entrepreneur who’s been through the process is Cosmin Mihaiu, CEO and co-founder of gaming rehabilitation software Mira Rehab. He says his team approached private investors too soon after developing their business idea as university students. They turned them down. Instead, the group applied to Healthbox Accelerator, which provided three months of mentoring and £50,000 for 10% equity. “It helped us understand the market and position ourselves,” he says. “As a result, we transitioned from a student project to a company. A year later we were contacted by an investor and got another round of funding.”
Moving up and “keeping the door ajar”
Once your business is established, you can apply for larger investments from venture capitalists. Octopus Investments venture partner manager George Whitehead invests in growing businesses with the potential to reach values of £1bn. He says decisions are based on the strength of a company’s management team and the ability of an entrepreneur to “sell the vision.”
Whitehead says it is important that businesses keep their investors informed about the company’s progress. By inspiring passion in the venture, he suggests, “they’ll be far more likely to provide follow-on funding and open up their networks of support”. This includes building relationships with investors that turn you down. “With any investor, keep the door open ajar and keep communicating,” he advises.
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