Last month I wrote about what makes a company investable and some of the pro’s and con’s of working with professional investment companies. In short, you get the money, but you lose some control and need to shape your business to make it more “investable”. For good reason some companies do not wish to go down this route.
Alternatives to traditional investment
Founders may well need money to scale, whether a business fits the traditional criteria for investment or not. If it does not, where does the money come from?
Many successful start-ups I have worked with, particularly those with a bright idea but no revenue, have generated initial investment from friends and family. While it might not be the most appealing idea in the world to ask parents, spouses, and close friends for money there are advantages: these people know you. If they have enough faith in you and your idea to back you, that is a significant boost for your own self-confidence and should provide much needed reassurance. At the same time, these are the people that are most likely to let you get on with the job of running a business how you want to and not interfere too much. Many tech start-ups I know have drafted agreements where the founder can buy back these shares once the investment has been paid back with a reasonable rate of interest. For this reason, friends and family often make the most flexible kind of investors for a start-up.
High Net Worth Individuals (HNWs) are another potential source of seed funding, although it can be challenging making the right connections to them.
There is no telephone directory of HNWs but there are certain things founders can do to get ahead. The simplest is probably to read the Sunday Times Rich List looking for people in the same business category or geographical area as you. It’s also worth monitoring the news for companies that have been acquired for significant sums. The directors of these companies often look for investments to reduce their tax liabilities from these windfalls.
There is also a network of advisors to HNWs – from personal financial planners to trusted CFOs. Over the past decade we’ve bumped into quite a few of these people and they are usually actively looking for investment opportunities – although it is important to understand precisely what they are looking for and not waste their time with irrelevant opportunities.
The idea that HNWs are inundated with opportunities may put many founders off approaching them. In my experience this is not the case. Indeed, many HNWs have told me how difficult it is to find relevant opportunities. The money is out there and like everything else, the more often you go fishing, the better your chance of having a fish supper.