Early-stage funding can often seem elusive to those eager to get their business ideas off the ground. David Pattison, author of The Money Train, outlines your options, and shares the questions you must ask yourself before you get going
Starting your own business is an amazing experience. It’s not easy – if it was then most people would do it, and most people don’t. Equally, looking for investment is very hard. There is no money tree growing in the garden that just requires a shake.
At the earliest stage of setting up a business, the whole idea of fundraising can feel daunting or even impossible. Whether you are at a Business School, a university incubator, or just a young startup, knowing where to start looks hard.
It’s also easy to underestimate how hard it is to raise money. This isn’t helped by the current market environment – 20 years ago, most people’s career ambitions were to ‘get their boss’ job’. Now, most people in their 20s want their own business. It’s an expectation that has been largely driven by the investment community.
Let me explain; there is a lot of investment money out there looking for a home. It’s hard to get but it’s there. The current model encourages young businesses and startups to take investment, or carry debt, to accelerate the growth of their companies. Not all of these businesses actually need to give equity away to investors to be successful. Some would get there anyway, albeit at a slightly slower pace and with a different financial model.
Do you need funding?
So, the first thing to do is work out if you really need to raise money through investment. Ask yourself some of the following questions:
- What would funding add to the business?
- How much do I really need?
- How much time would it save?
- What would be the costs of raising money and diluting shareholding and controls
- What multiple of success would it add?
- Could I run the business without funding?
- When would I need the money?
Having answered these questions, you should have a good idea of what level of funding you need, if any. At very early stage, that might be a very small amount. It could be as little as £500 GBP, or as much as £100,000 GBP. In my experience, most founders seriously underestimate how much they need to get things going because £5,000 GBP can feel like a lot of money at a young age. For a startup, it isn’t.
You will need the first round of money to get towards proof of concept. Being able to answer these sorts of questions:
- Does the product/service work?
- Are people prepared to pay for it?
- Are they prepared to buy it multiple times?
And to be able to answer the really key question: ‘I know there is a gap in the market, but am I convinced that there is a market in the gap?’
Having got to this point, don’t just jump straight into looking for investors. There are other options, particularly if the money required is at a low level. Look into:
- Government or commercial grants
- University business incubators which have funds available
- Loan options
I said at the beginning that getting an investor on board is really hard. Getting the first investor on board can feel like the hardest. But, looking for money at a really early stage can be slightly less difficult. The reasons are twofold: firstly, you are most likely to be dealing with individuals and not institutions, and secondly there are often attractive tax breaks available to these individuals. For example, in the UK there are government schemes like the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). I won’t go into details, but these schemes offer instant tax relief to individuals and even offer some relief against losses.
Emotional and rational investors
It’s worth pointing out at this stage that, in my view, there are two types of investor: the emotional and the rational. The emotional tend to be individuals who choose to invest and, at the early stages, this type of investor will almost certainly be who you will be looking to raise money from. The rational are the institutions which have to invest, as they have to commit all of their funds on behalf of their clients. The rational tend to be more formal and much more rigorous around the due diligence and legal processes.
So how do you find these ‘emotional’ individuals and how do you then get them to put money into your business? In its most simplistic form, you need to get out there with confidence and a good coherent story. Show that you know your company, your market, your people, your competition and, most of all, your opportunity and your exit strategy. You have to be prepared to sell yourself and your company/idea to a whole range of people.
Be prepared to drink a lot of tea/coffee and accept that you will be a lot of frogs to kiss before you find your prince/princess.
Sounds easy doesn’t it?
Getting out there
But how do you meet these people? Talk to everyone you know. The first place to go is the three Fs: friends, families and fools. Do not be afraid to ask. If they can’t help, they might know people who can and be prepared to introduce you. These will be your best-ever investors. They won’t be too rigorous or insistent in their demands around the shareholders agreement and may well be there if you hit a bump in the road in the future. They really want you to succeed and will probably be attached emotionally as well as rationally. Just one word of warning, make sure that these investors understand that they may lose their money. Potential investors who can’t afford to lose their money should not invest.
Approach other young businesses in the sector you are in and ask if the founders would be willing to share their ‘war stories’. You will be amazed at how many will be happy to chat to you. Don’t waste their time though. Ask them to point you in the directions of potential investors. There are also angel networks that you can approach. These tend to be more formal, but can sometimes be the solution if you are looking for a larger amount.
Talk to experienced businesspeople you or your family know. They will all know someone who knows someone. Approach experienced people that you don’t know who have been in the sector that you want to operate in. These will probably be people you don’t know. They all operate in informal networks and they will probably be able to advise on more than just fundraising. Again, other founders will know who they are.
Crowdfunding is another option, particularly if you have an interesting product that the investors can get at a discounted rate, or access to something that is unique to them.
There are other options as well, but the basic advice is the same. Get out there and find these people. Be well prepared and explore all of the options. Say ‘yes’ to every potential contact even if on the face of it there is no sense in doing it.
It’s very hard to predict where money will come from at the early stage. You need to be well prepared for all the conversations and be unfazed by disappointments. Remember that the person who is most excited and enthusiastic about your business is probably you. Don’t take someone not investing personally. One thing I can predict is that, at this early stage, money will be offered from places you don’t expect it to come from.
Good luck.
David Pattison is Co-Founder of media agency, PHD – later sold to become part of the Omnicom Group and now a worldwide brand in 80 markets. For the last 10 years, David has worked as a chair or mentor for a variety of businesses and CEOs. He is the author of The Money Train (Practical Inspiration Publishing, 2021).
BGA members can buy a copy of The Money Train at a discounted price, courtesy of the BGA Book Club. Please click here for details.
