Many of the start-ups I encounter have fantastic ideas and an ambition of global domination but fail to understand the funding they need to make their dream a reality. Despite the increasing amounts of venture capital that are available now they rarely raise enough to implement their plans. They are what I call “resourced to fail”. That is, they have just enough capital to convince themselves they should keep going but not enough to really break through.
Some of this is driven by a reluctance to give up equity in their business but mostly it’s down to a failure to properly plan the funding they need. Too often they see how much than can raise and then try figure out what they can do with it rather than funding a comprehensive go to market plan.
We need then to develop a such a funding plan, driven by our Strategic Plan. In my previous article “Strategic Planning – The Route to Growth” I described how to develop a Strategic Plan. One of the key elements to such a plan is defining the financial resources that are needed to execute it and when they are needed. This is the starting point for our Funding Plan. With these identified the next step is to identify the source of funding that will best meet it, there are a number of options for early-stage companies:
- FFF – short for Friends, Families and Fools, basically anyone who will trust you with their hard-earned cash. This is probably most common at the bootstrapping stage and usually only provides enough for a business to get started, unless you know very wealthy people!
- Grants – this is free money the government provides through various agencies, Innovate UK is one, to fund businesses where there is a market failure. In other words, the venture is too risky for commercial investors to back. This provides a clue as to what they fund. There has to be research and development to create some proof of concept before commercial backers will come in and Grants fill that gap. Grants do normally require some “match funding” though, typically 30% – 50% and the money is usually paid in areas.
- Crowd Funding – There are a number of on-line platforms that provide funding through accumulating contributions from individuals, “The Crowd”, and they fall into two categories 1) Pre-purchase and 2) Equity. Pre-purchase is where the crowd agrees to purchase the first runs of a product before it actually exists. This type of funding can be useful to build initial production runs or to prove customer demand. Equity platforms on the other hand sell shares to “The Crowd” much as you would a regular investor and so can provide strategic funding.
- Angel Investor – This type of investor will provide funds for shares or equity in the business and are a major source of early-stage funding. They typically invest amounts in the £150k – £250k range. The main thing to understand here is that Angels invest their own money. They are typically entrepreneurs who have exited a business with money or have made money in the financial markets.
- Venture Capital – This type of investor is a business, they again provide funds for shares but typically invest much larger sums, typically £2M plus. The thing to understand here is that VCs invest other people’s money, not their own. They run funds in which people invest and then distribute those funds to a portfolio of start-up businesses. As such they have a contract to return the funds plus some within a given timeframe, typically 10 years, so they have different constraints because of this.
It’s important to understand the different types of investors so that you can match your need to the types of investment they are looking for and we’ll look more closely at this next month in Part 2 of this blog.