Most businesses don’t make it big on passion and graft alone. To properly get off the ground and start proving your ideas in the real world, you’re going to need some capital. Stock, equipment, marketing and skills – all of these things cost money and, until you start turning a profit, that early-phase spending can be tough.
Unless you’ve got some fairly hefty savings behind you, investment and/or loans are usually the only way to get the early cash injections you need. But the world of finance can be pretty daunting to the uninitiated. The jargon, the options, the process – it’s all a bit bewildering.
Should you aim for the maximum you can get? Or focus on agreeing the most convenient T&Cs? What are Angel Investors, Seed Funding, and Incubator Programmes? Will an investor gain control of your business decisions? And how on earth can you convince anyone to hand over the moolah?
It’s a lot to work out, so you need to get as clued up as you can, and fast. The kind of investment you gain in the early stages can shape the future of your business – and determine its success. So, it’s crucial that you get it right.
To help you out, we’ve put together the ultimate guide to everything you need to know about startup funding, including the pros and cons of the main options, the process you’ll go through, as well as some hints on how to land the big bucks.
1. Why you need investment
To start off, it’s worth asking a crucial question: Do you even need investment?
If your overheads are small, or you’ve already got capital behind your idea, you may think that it’s not worth the bother, or the additional risk. And that’s perfectly fine. However, investment isn’t just about making a quick buck with which to buy shiny things. Investment is about buying time.
When you’re starting out, the most important thing to do – the thing which will guarantee your success later down the line – is to prove your product and/or business model. This is where you should be concentrating all your energies. You can worry about profit margins later – right now, you need to get to grips with what you’re doing, why you’re doing it, and how you’re doing it.
That’s tricky if you’re spending half your time trying to sell, sell, sell. Selling is important, of course, but everything is experimentation at this point – including your marketing and sales process. Investment will give you a buffer with which to hone and refine your techniques, so that you can build up some metaphorical market muscle without crashing and burning.
There are disadvantages to bringing in investors, of course. It would be wrong of us to pretend that it’s all dollar signs and shiny toys! Investors don’t (usually) give something for nothing. You could end up tied into more responsibility than you really want at this stage, with restrictive contracts or external controlling stakes. Or you could find yourself moving too fast, too soon, as investors push for returns. However, if you’re careful about getting the right kind of investment – the right kind of deal for your business – you’re likely to set sail in a more stable position than may otherwise be the case.
2. What are your options?
This is where it can get confusing for the unprepared. There are many, many options for startup funding. The world of investment is large and labyrinthine-like, which can be off-putting for many startups. But it’s really not as tricky as it seems at first glance.
There are several basic options for investment, which we’ll walk you through below:
- Angel investors: These are affluent (high net worth) individuals who provide capital for startups, usually in exchange for ownership equity. Angel investors can be anyone, from a well-resourced personal friend, to a stranger who simply likes your concept, or even a celebrity – Ashton Kutcher, for example, has famously built an astonishingly successful investment portfolio. Angels have more autonomy than venture capitalists (on whom more later), which often means that you can negotiate more flexible terms with them than may otherwise be the case. However, they’re also taking a greater personal risk than a VC investment firm, so may well want to see more equity or business influence in exchange for their investment. Read our Ultimate Guide to Angel Investment.
- Networks and syndicates: This is a group of angels, normally led by one or two individuals that have a better understanding of your industry or business idea. This is where the line between angels and venture capitalists starts to get a bit blurry. Angel networks and syndicates tend to be a bit more risk-averse than single investors, but on the plus-side they do have greater resources in terms of finance and connections. Angel syndicates are growing in scope and popularity at the moment – Green Angels, for example, seek to improve the world by investing in ventures which aim to improve the environment.
- Crowdfunding: Massively on the rise right now, crowdfunding involves pitching your idea to a large audience (usually through certain dedicated websites such as Crowdcube and Seedrs, and inviting the public to donate. If you can engage the public – or your existing loyal customer-base - you can potentially get large cumulative amounts from thousands of small investors. One business that has done this really effectively is Brewdog, due to its distinctive attitude and cult following. But, if you’re an unknown brand, crowdfunding can be an uncertain process and requires a lot of promotion behind it to be successful.
- Venture capital: A step up from angels, VC firms invest in early-stage, emerging growth companies on behalf of high net worth clients, usually offering 50% or less of the business equity. These are professional investors – the investment big leagues. They usually have all kinds of protocols and due diligence procedures in place, which on the one hand can reduce the risk, but on the other hand lessens the flexibility of the deals they can offer. If you manage to secure the interest of a VC firm, you’ll be in line for a ton of incredible resources. But be careful – VCs can be tough about what they want to see in return, and you could end up sacrificing more equity in your business than you care to. If you’re looking to source VC investment, here’s a list of leads.
- Bank loans: Bank finance is a lot tougher to get hold of than it used to be, but it’s not impossible. Business loans have a major advantage in that you keep 100% of the equity in your business. However, you will be paying interest on the loan, and bank loans usually represent greater personal risk than funding from investors.
There’s a certain amount of flex within these options (and this is by no means an exhaustive list.) But getting your head around the different avenues and what they mean, will give you a valuable head start in your search.
3. Mapping out the startup investment roadmap
It’s not just about knowing what kind of investment options are out there, of course. It also helps enormously if you know what kind of shape the investment process is likely to take.
Investment timescales and procedures seem as confusing at first sight as everything else. From seed funding to series A, B and C, it sounds worryingly like a conveyer belt that you jump on as a founder, before being automatically shunted along to the different stages.
In fairness, it is a bit like that. But everyone’s conveyor belt is slightly different, depending on the individual business and its needs. So if you know how each stage works, you’ll be better able to decide when and how your business should source the funds it needs to keep moving forward.
To give you an idea, here’s a typical timeline of the investment stages, when they tend to happen, and what they’re used for:
1. Family and friends
Bootstrapping with your savings is only sustainable for so long. You may have an early-stage prototype to work with, or a decent business plan. But with little to show investors, it’s too early to go through a more formal funding round. That’s where your friends and family come in! Research shows that around a third of startups do this and it’s a great way to tide you over for a few months while you develop your brilliant idea.
2. Seed round
The money from your friends and family probably won’t last long, so it’s important to build a decent prototype or MVP (Minimum Viable Product) as quickly as you can. You need an MVP in order to start courting ‘seed investors’ – primarily angel investors - who ‘seed fund’ your business by providing a flow of money as and when you need it, up to a certain amount. With your business still in an embryonic state, this money will be invaluable for taking it to the next stage, which may mean bringing your product to market, building your team, or investing in design, branding and marketing.
3. Series A
This tends to happen once your product or service is pretty clearly defined, you’ve launched to market, and built up some solid traction with your customer base. In the series rounds, you’re usually talking to venture capitalists, and Series A is typically required to optimise your product and user base, perhaps monetise your service if you haven’t already done so. You’ve shown your idea works and there’s a market for it - now it’s time to perfect it.
4. Series B
By this stage, you have a well-established business. You’ve got a strong team behind you, your product is well-managed, your marketing is doing its magic and your customers are buying your product or service. Series B is all about building and scaling your venture, through taking on staff, investing in marketing and advertising, perhaps expanding into new markets. You might even be considering acquisition at this stage, to bring in new technology, or remove the threat of a competitor.
5. Series C
There is no limit on the number of series rounds a business can go through, and series C is effectively a continuation of A and B, enabling you to invest in the areas that need an injection of cash to take the business to the next level. It can also be used for what is known as ‘bridge funding’, to help the business prepare for an IPO (Initial Public Offering) or sale. By this point, you’ll be raising hundreds of millions of pounds for your company.
6. IPO or sale
The final step! Many entrepreneurs go for years before reaching this point, and many businesses are staying private for longer – just look at Uber and Airbnb. But most entrepreneurs and their investors want to cash out eventually. An IPO gives you a way of raising cash quickly and giving your investors greater liquidity, so their money is no longer tied up in the business. The other option is to sell your company to a competitor, or perhaps a private equity firm, to take it to the next stage of its journey, leaving you to move onto pastures new.
4. Getting prepared
So, you know roughly what you should be looking for and when. Now it’s time to start honing in on potential investment partners. But before you start blasting out emails to all and sundry, lay the groundwork through the following:
- I. Prepare in advance. Make sure that you know how much investment you’re looking for, when you want it, what you want it for, what kind of deal you’d like attached and the kind of investor you seek…you get the picture! Seeking investment is a big, time-consuming project, and it needs to be taken extremely seriously. Your success in finding investors could very well prefigure your success as a business in the future. So really pour yourself into it! That’s likely to mean taking your focus away from the day-to-day running of your business, which is why it helps enormously to have a co-founder or trusted team to pick up the slack.
- II. Get your bearings. Do your research. Study the investment market and get as clear an idea as you can of what’s available, how it operates, and where you stand in relation to your ideal investor-type. Talking with fellow founders who have already been through the process can be a great starting point. If they’re not in competition with you, they should happily give you names, numbers, dos, don’ts – maybe even introductions. Also try to attend any relevant conferences, seminars and networking events, where you can interact with investors and companies who have been where you are. Just watch out for events with more people looking for cash than those who have it. If you’re spending most of your time talking with other startups, it might be time to reassess your strategy!
- III. Draw up a wish list. If you’ve got your bearings properly, you’ll probably have identified a few potential investors you might like to get involved with. Draw up a wish list of your ideal investors, and the ideal terms you’d like to end up with. This will help to focus your efforts. Investors often like to build a complementary portfolio of businesses so try to find those where there’s a synergy and think about how your venture fits alongside that. This can give you a useful ‘in’ when you start connecting.
- IV. Work out what you’re prepared to offer. Most investors have had a successful business career of their own, so many understandably want a voice in your business. You may have heard the term ‘smart money’- this is what it means! So, have a good think about what you’re willing to offer an investor, and how much input you want them to have. Their experience, mentoring and guidance could be invaluable, but what are the implications of that – would you give away a board seat, for example? Setting boundaries early on will influence which investors you approach and how you respond when you meet them.
5. Deciding on a valuation
Many a founder has tied themselves in knots over valuations. But to know how much you can expect to get, you need to have at least a rough idea of how much you’re worth.
Search online and you can find various complicated models for how to approach pinning a price tag on your business. Feel free to browse the intricacies of EBITDA, Comparable analysis and DCF Analysis for some cosy bedtime reading!
The truth, however, is that when you’re fresh out of the box, and your figures and your forecasts are more guesswork than anything else, fitting your burgeoning business into a headache-inducing equation can be a waste of time and effort. And in many cases, it isn’t the first thing investors are looking for anyway.
So, what’s the best approach?
- I. Be realistic: Excessively high valuations can scare people off, so don’t get carried away. All investors are essentially taking a leap of faith in a business, so if you present a massively high valuation without any solid evidence to back it up, you’re going to look a bit too naive to risk doing business with. Unless you’ve got a market-ready product, a ton of customers already lined up and some solid figures, don’t pull gigantic numbers out of the air. Investors like to see realism and a degree of common sense – waving around unrealistic profit projections isn’t going to help with that.
- II. Focus on shared ambition and vision: If you’re short of numbers, don’t despair, as communicating a compelling ambition and vision can be just as important as a solid valuation. The most important thing is that you agree about the ambition for the next five years and what you’re going to do with the business. If you agree about all those things, then you should also agree about the valuation. If you’re massively far apart then perhaps you’re talking to the wrong people.
- III. Don’t get distracted by other businesses: Startups often base their valuations on figures released by other businesses in the same industry, but this can be misleading - particularly if you’re comparing numbers with American companies, which tend to be valued much higher – as much as double – their European counterparts. It’s not a competition.
- IV. Give your business room to grow: Investors expect your metric to increase with each funding round, so allow for that. What will secure you greater investment in subsequent funding rounds is proof of growth and progression over time – which won’t be evident if your metrics show you wallowing in the same pool of money, with no growth. Consider the perspective of the investor. They don’t want their stake to just sit there – they want it to work at increasing the company’s value, and therefore the value. Think always of giving the figures room to rise!
- V. Be ready to negotiate: Remember the ‘endowment effect’. Business founders tend to value things that they have made themselves far higher than outsiders would (for obvious reasons!) VC firms are aware of this, and always take the endowment effect into consideration when settling upon a final figure. So, be prepared to negotiate and compromise. Don’t get upset when your potential investors counter with an offer that’s lower than what you anticipated, and don’t be greedy. Negotiate until you hit upon a deal which works for everyone.
- VI. Put the business first: Don’t take disagreements about valuation to heart and always prioritise the business, particularly when agreeing on the split of equity partnerships. Your priority should be the future of the business - 10% of nothing is still nothing, so is it worth falling out over small differences in equity share? If your co-founder is the right business partner, equity split can be sorted later. The biggest problem is if the business falls apart.
- VII. Get a second opinion (or a few!): Not enough startups spend time asking around to see what others think their business is worth, for example, getting the opinion of a business mentor, or even family or friends. For a founder, valuing a business is a very emotional thing, so gather as many objective views as possible to feed into your decision. This will enable you to quickly get a view as to whether you’re completely off whack.
Valuing a business can seem like a big deal but try to keep it in perspective. The key is finding the right team, advisors and investors, who understand where you’re going and want to help you get there. Get that right, and everything else should fall into place.
We've also spoken to Alexander Mann of Concentric Venture Capital and Angel Investor Lucy Viggers about how to value early stage businesses for investment.
6. Crafting your pitch deck
You’ve done your research and you know what you’re after. The next step is preparing a pitch deck – probably the most important tool in your investment arsenal.
Contrary to what the name suggests you won’t always be using your pitch deck to ‘pitch’ – not in the Dragon’ Den sense anyway. Networking and getting introductions to the right people is central to winning investment, which means your deck will often get forwarded around various people before it hits its mark. Your deck must therefore stand on its own, containing all the key information you want to get across, even if you’re not there to physically present it.
So, what should a winning pitch deck cover?
Core content and structure
There’s a pretty standard structure that most businesses follow, and it looks something like this:
- What’s your ‘why?’ You need to start with a bang, so make sure your initial slides are extremely compelling. Short and punchy is better – you should be able to describe what you do in one sentence. The role of this slide is to make your reader click through to the next one.
- What problem are you solving? All investors love a good story, so make sure you bring this to life, explaining the inspiration behind your product or service, and the difference it makes to your customers’ lives. If you can relate it to your own personal experiences, all the better.
- And how? Here you can delve more into the details. What are your offering, how is it unique, and what are the main benefits for the customer?
- What’s the secret sauce? Explain the technology underpinning your product. What are the crown jewels that enable you to solve problems with current services? Avoid ‘buzzword bingo’, by throwing in terms like AI, IoT and Blockchain to get attention. Investors have heard it all before, so instead, focus on how you’re using the tech in novel ways to solve old problems.
- Who’s going to buy it? This is absolutely critical, as it shows the size of your potential market and therefore the potential size of your future business. Dig out the strongest figures you can find, whether from industry reports, the Office of National Statistics or your own market research.
- Show the traction you’re making: As a startup you won’t necessarily have loads of customers and sales under your belt, but investors want to see that your products and services have been successfully tested in the market, even if it’s in a limited way. If you’ve done beta tests include reviews from these, or details of the size of your waiting list, if you have one. Awards and PR coverage can also be great proof points.
- Identify the competition: It’s important to show that you’re aware of the wider market and who could potentially threaten your plans for global dominance. This enables you to highlight once again how your offering is different and where there’s a gap in the market for a new way of doing things, in answer to current trends, or to cater for currently underserved consumers. Don’t belittle the competition but do show why your offer is better.
- Sell your business model: All of the above is pointless if the sums don’t add up, so be clear on how you’re making money from your idea! Fans of Dragons Den will know this is usually where contestants trip up, so don’t leave any room for confusion. Having said that, don’t go overboard with financial details or other metrics in your presentation itself. Keep it to the key figures, then be prepared to add more colour around these when you meet, or as a follow up. Scroll up and re-read our advice on valuing your business, if it helps at this point.
- Talk about your team: People buy people, so introduce your whole team. Showcase the aggregated and personal wisdom you’ve built around you. This should include any advisors and existing investors you have on board.
- What you’re after: Finally, don’t forget to ask what you’re actually asking for in terms of investment, what you’re planning to use the cash for and how it will help you achieve your business goals.
- Wrap it up: That’s it. Then all you need is a final slide, thanking them for reading and with your contact details for any follow up.
Remember, we've rounded up everything you need in our Startup investor pitch deck.
And don’t forget to…
- Keep the deck brief, no more than 15 slides.
- Avoid jargon, complex words or too many words.
- Maximise strong imagery to illustrate your points.
- Send it from a professional email, with your branded signature.
- Attach the deck as a simple PDF. Avoid Dropbox and other platforms that require the recipient to sign onto a platform or jump through hoops. Make it easy.
- Spot the typos. Have somebody else check the document and your cover email for you.
- Protect your IP (and show you’re savvy to its value). Send the document copyright protected with the phrase: Confidential and Proprietary. Copyright (c) by [Name of Company]. All Rights Reserved.
- Have the deck professionally designed. It should convey your brand, your expertise, your processes and resources. The investment is worth it.
Ensure you spend plenty of time honing your pitch deck, as well as perfecting it based on feedback from investors and others in your network. Then with a bit of luck, you’ll soon be rewarded with plenty of investor meetings in the diary!
7. Time to connect!
First, a word of warning – investors receive hundreds of ‘world changing’ business ideas every week. Perseverance is the name of the game!
A good first step is to drop them an email or give them a call to pre-qualify your interest. Keep it short, relevant and personal – they can smell a bulk email a mile away.
Many investors provide guidance on their website on how to approach them – read it! And if you can get an introduction from a mutual contact, all the better. Check LinkedIn to see if you know any of the same people.
When it comes to setting up a pitch, if you have the option, aim for a more casual introduction or meeting over a formal process. But you should always be ready for every eventuality, including more structured pitching processes.
8. Pitch with pizazz
If you’ve done your prep properly, you should be all set! But here’s a few final tips for making a good impression on the day:
- Don’t ramble on – If you’ve been given a time limit, stick to it, leaving plenty of time for questions. Your presentation should be tailored for every pitch - don’t try to fit a ten-minute presentation into a three-minute time slot!
- Clarity - Be totally clear about what you need, what it’s for and the anticipated return for investors.
- Show your passion – You cannot be too enthusiastic in a pitch. So give it some welly!
- Look sharp – Whatever you do, don’t rock up in your ‘just got out of bed’ look. Remember, first impressions count and investing in some new threads could well pay dividends (quite literally!)
9. Was there a spark?!
So the pitch is out of the way and there’s an offer on the table – job done! Well, not quite. Before you bite their hand off, just take a moment to evaluate whether the chemistry felt right from your side of the table.
For example, did they ask the right questions and show that they understand your vision? Do they meet any other criteria you have, such as industry experience, contacts or complementary skills?
If the answer is yes, then fantastic. If not, then consider whether you can live with the sacrifice - or if you’d rather hold out for a better offer.
Also, it might seem crazy but do your investors actually have sufficient funds to finance the deal? While it’s not unusual for investors to finance some of their investment with bank loans, make sure it’s not more than 50 per cent of the equity. Otherwise you could end up with a mountain of debt you didn’t bargain for!
Also, do your best to avoid time wasters. Some investors have lots of meetings, but never commit. Don’t be sucked in!
10. Don’t give up!
The kind of startup funding you secure really can make (or break) your business. It’s so important to get it right.
This means not just thinking about the number of zeroes, but also the kind of person you want to deal with, how much equity and control you’re prepared to relinquish, your future (and exit) plans - and much more. This means making a serious commitment to putting a lot of graft in. Pitching for finance is a full-time job! Every investment round feeds into the next, so your approach to investment has to be nuanced, and fit in to a long-term strategy.
Of course, nothing is set in stone. At the end of the day, you’re dealing with human beings, and there’s a lot of variation in what different investors will offer you and what they’ll expect in return. The best you can do is research your options thoroughly, polish your pitch deck until it shines, and put your negotiating hat on.
And last but not least – have persistence! If your ‘perfect’ investor says no, don’t be disheartened. They are plenty more fish in the sea, so be resilient and try to learn as much as possible from each experience.