Start-up finance: How to get your business funded
Insider tips from investors and investees on business angels, the ‘sweet spot’ for crowdfunding, and tax incentives such as SEIS and EIS...
What funding route should you choose and how do you get investors to back your business?
To kick off the official launch of Global Entrepreneurship Week yesterday, leading names from the finance world came together with successfully funded start-ups to discuss these very questions.
Sharing their funding experiences were early-stage entrepreneurs Pippa Murray of nut butter brand Pip & Nut, and Daniel Pinchassof of robotics start-up Robabu. Both business owners secured start-up capital this year; Murray raised £120,000 in an oversubscribed crowdfunding round on Crowdcube and Pinchassof was given a StartUp Loan through Virgin StartUp.
Alongside them on the panel was Jenny Tooth; CEO of the UK Business Angels Association, and Julia Groves; head of the UK Crowdfunding Association and CEO of crowdfunding platform Trillion Fund.
With advice on tax initiatives such as SEIS and EIS, the ‘sweet spot’ for crowdfunding, and insights into returns on investment, the discussion offered up plentiful food for thought with moderator Rebecca McNeil, head of lending at Barclays, concluding that raising finance was all about “getting the balance right between being ambitious and realistic”.
So, if you’re looking to raise finance, be it from angel investors, from the crowd or in the form a loan, make sure you read the Q+A below:
What do you wish you had known before you raised funding?
Pippa Murray: “When I started raising funds, I had to get to grips with valuing my business at the right amount – when you’re pre-revenue it’s really hard to do and that was the first hurdle.
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“You need to look at what your break even point is. Be realistic and look at the size of the market.
“The second thing I would recommend is to pull together a strong team – we had a finance director, and mentors that had already done it and been through [the funding experience]. Get a credible branding agency too. Make your business as scalable and credible as possible.”
Julia Groves: “My advice would be to get as far down the line as you possibly can before you raise funding.”
Daniel Pinchassof: “It’s difficult to [garner] confidence in a product which is pre-revenue, that’s what I found hardest, you have to network.”
What made you choose your funding route?
Daniel Pinchassof: “Securing a StartUp Loan was quick and came with extra support. Virgin StartUp has continued to support me.”
Pippa Murray: “I chose crowdfunding as it was great to have so many people backing my business – they’re ambassadors of the brand.
“I also went with it as I needed a specific amount of funding and I needed the marketing push which it [crowdfunding] gives you.”
Julia Groves: “The funding route I least enjoyed was venture capital (VC) funding as it was all based on quarterly milestones and you had to follow the business plan to the tee – you weren’t able to swerve off the plan at all.”
How does angel investing compare to crowdfunding?
Jenny Tooth: “Most important thing to remember is this [angel investment] is not a quick process, whereas crowdfunding has the advantage of speed.”
“With angel investors, it takes time. You may have to pitch your business several times, you need to know contacts and know your market. Get your head inside the investors mind and understand why they would want to back your business. Think about the benefits to them.
- What will an investor want to know?
- Can you bring them a return?”
Julia Groves: “Crowdfunding [and creating a crowdfunding campaign] gets you to break down your idea to the very salient points.
“Don’t underestimate the power of the crowd. […] I would encourage people to look at equity crowdfunding, especially if your idea is targeted at consumers. […] There’s now 44 crowdfunding platforms in the UK.”
Pippa Murray: “There’s a momentum you need to have when crowdfunding, the sweet spot is reaching 33% of your target as that can validate your business. For my own piece of mind, I needed to get to a certain point of funding in the first few days. My pitch hit £60,000 and within 24 hours it went up to £120,000. It was exciting.”
What can businesses do to attract investors?
Jenny Tooth: “There are tax breaks and relief which encourage investors to back your business. The SEIS (Seed Enterprise Investment Scheme) offers 50% tax relief.
“For EIS (Enterprise Investment Scheme), you can raise up to £15m over the lifetime of your business and investors can back up to £1m each year.
“For EIS and SEIS make sure you go onto the HMRC website and submit your details for their ‘Advanced Assurance Application’. They will give you a response within three weeks which gives you advance clearance to say your business is eligible for the schemes. It’s nice to put that in your pitch and investors like it as it gives them a tax break.”
“The most common way for angels to invest is through syndicates. […] I would go for syndicates not individual investors.”
Julia Groves: “85% of equity crowdfunding is through SEIS and EIS (Enterprise Investment Scheme), that’s one of the unique spots about the UK.”
How long can the funding process take – from pitching for investment to securing the funds?
Julia Groves: “Preparation takes the longest time. For crowdfunding you’ll need to have a video and a well thought through pack of information.”
Pippa Murray: “I had investors lined up from when I had pitched to them before so I knew I was going to be able to hit at least £70,000 of my target. With Crowdcube, I was able to pool all the investors together. The process is really quite simple – due diligence was done before hand.
“[My advice is to] line up as many investors beforehand.”
Daniel Pinchassof: “It took me six months to get the funding I would say. There was due diligence which took about two months.”
Jenny Tooth: “There’s a lot of prep. Due diligence is huge – you’ll be asked 100 questions to make sure everything you say is correct about your customers, sales etc. You’ll have a term sheet which will be agreed; we use this to keep the legal time short.
“Angel investors aren’t really worried about working capital, they’re more concerned about growth and expansion. They have a long-term view.”
What amount of control should investors have over your business?
Julia Groves: “It’s a bad thing if an investor tries to redesign your logo, put it that way! If they only want to play with your company it’s not right.”
Rebecca McNeil: “The entrepreneur and the investor shouldn’t be working against each other but should be complimenting one another.”
Julia Groves: “But you are giving up some of the controls via equity.”
What returns do investors usually look for?
Jenny Tooth: “As an angel, I look for a 10 times return. That may seem steep but I know that, of my portfolio of businesses, 50% of them will fail. It’s a horrible thing to say but that’s why we look for those kind of returns.
“Angels are very patient. Waiting five to seven years for a return is perfectly normal but you need to think about whether you’re prepared to head towards an exit or management buy-out. If you’re not then go with the crowdfunding route.”
Julia Groves: “It’s a common mistake to say you’ll be where you want to be within three years, it’s just not achievable. As part of Trillion Fund, I look for when the business will break even at the earliest stage.”