Tech start-ups: How to attract investment
Entrepreneurs Tim Jackson, Nick Holzherr and Stefan Siegel share their advice for early-stage digital and tech businesses looking to raise finance
Raising finance was the topic of conversation at Google’s Campus London when entrepreneurs Nick Holzherr, finalist on The Apprentice and founder of Whisk.com, Not Just a Label founder Stefan Siegel, and Tim Jackson of QXL and Lean Investments came together to share their “answers to the questions about funding that start-ups really want the answers to”.
Hosted by Marc Cameron, founder of Seven magazine and forthcoming website 2210 Fashion, this is the fourth in our series of talking points. Having covered whether Tech City is working, when the best time to start a business is, and the funding paths of our panellists, the three revealed their best tips for raising finance, shared views on government funding schemes, and gave their view on investor appetites and internet bubbles.
Read on for some fascinating insights…
What’s your main piece of advice for digital start-up entrepreneurs looking to raise finance?
Nick Holzherr: “If you haven’t started yet, look at other competitors in the market. Don’t be under any illusions that you’re the only one doing it as you won’t be. Look at what they’ve done and try and copy the obvious processes that they’ve put in place, then find the 10% or 20% that makes you better. Try and get to a point where you can get some feedback from the market as to whether your product or service is useful or not. If you can do that you’ll convince yourself that it’s a good idea and it will be much easier on the way.”
Tim Jackson: “If you’re trying out a new product by doing customer development and thinking about whether it’s something they’ll want to buy, then you could spend £1,000, £10,000, £50,000, £200,000 doing that. You can actually get the insights you need for an amazingly low price if you’re willing to do the leg work early on. Always test the market.
“I would use the piece of advice my father gave: ‘Do what you love and do what you find stimulating because generally you’ll be able to make a reasonable living out of it.’ I think that applies to start-ups. If you don’t feel that a start-up would be a valuable use of your time, even if it fails, you probably shouldn’t do it.”
Nick Holzherr: “I think Steve Jobs said ‘once you realise that it’s no harder owning your own company than working for one, you will never work for a business again’ and I think there’s a lot of truth in that. You haven’t got that much to lose.
Stefan Siegel: “I think cut the bullshit. Look at what you’re starting a business for. You need to do it for yourself, not for money. Glamorisation of entrepreneurship is not reality and being an entrepreneur and making a decent living out of that is hard but can be a good option.”
“Glamorisation of entrepreneurship is not reality.”
What are the top things that would make you invest in a pitch?
Tim Jackson: “I make investments from £500,000 down to £10,000 and it depends on the person and what they’re offering. There’s four basic things I look for when investing:
- Team – I love investing in great people.
- Traction – I really care about how much progress you’ve made with your business. The common thing people say is: ‘If you give us £100,000 we’ll hire a web agency to build it and we’ll hire a PR agency to build our profile.’ I’m interested in what you can do without investors.
- Market – Generally speaking it’s not that much harder to build a business in a really big space than a small space.
- Barriers – It has to be a sustainable business – can you do something which will stop other businesses eating your lunch? It’s quite hard to compete with other similar businesses who will undercut you.”
The tech investment opportunity
Why do you think digital and tech businesses are such an exciting proposition for investors?
Tim Jackson: “I actually think it’s the same story that it’s always been for the last decade which is that the economy is changing. There are lots of new businesses and new sectors that weren’t there before, when that value is being created investors want to be part of it.”
Nick Holzherr: “My first business was a coffee business and I realised that when you’re building something that needs a huge deal of capital investment to get going, it’s not that attractive for someone to invest their time in. Technology is something that is hard to make work in the first instance when you’re trying to find that product-market fit but it can really take off which is why investors want to put their time into it.”
Stefan Siegel: “Technology is transformational. There is a huge opportunity to connect ourselves with the world.”
Tim Jackson: “I became an entrepreneur because I’d been writing about tech companies for years [Jackson used to be a writer for the Financial Times] and I realised that this wasn’t a normal economic cycle. This wasn’t just a once in a lifetime thing but I felt this was a once in a Millennium thing like Johannes Gutenberg (introduced printing to Europe), the railways, and the launch of the telegraph, all rolled into one. There were three waves here; one was the initial internet connection with lots of rich people with their desktop computers, then there was mobile, and still coming is the connection of the ‘other’ around the world. I think that’s massive and there’s a lot more to come.”
“This wasn't just a once in lifetime thing but I felt this was a once in a Millenium thing.”
Are digital businesses becoming less risky to invest in?
Tim Jackson: “If you look at valuations, it’s actually becoming more risky. I think there are some serious signs of a bubble forming and lots of tech entrepreneurs I know are assuming that it’s easy to secure investment. My advice would be to raise money when you can, not when you need to. Sometimes if someone’s merely willing to put cash on the table right now, even if it’s not the valuation you like, there can be a case for that.”
“My advice would be to raise money when you can, not when you need to.”
Government has introduced the StartUp Loans scheme and the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), have you used any of these schemes?
Nick Holzherr: “We’ve used SEIS and EIS. The difference is tax breaks, the maximum rate that investors get is back 98% through tax breaks. Investors are now turning to start-ups as they get better returns, and if you’ve got a good idea, are a credible founder, and can show come sort of traction, now is probably the best time there’s ever been to raise funding.”
Tim Jackson: “I think there’s a warning here with these tax incentives, particularly SEIS, as there’s little at stake for an investor. What that means is that there’s a huge number of un-informed rich people making investments in tech start-ups. The good news; if you can deliver a half decent pitch they’ll write a cheque. The bad news; they actually may not be able to help you very much. They may sign a cheque but you have to put the money towards your start-up. They can write it off if it goes wrong, but for you it’s a year or two of your life to do a failed start-up. Just because people are willing to give you money doesn’t necessarily mean you should take it.
“You’ve got to ask yourself:
- Is this something I want to spend my time on?
- Is this a great product or service which I’d love to build and really feel passionate about?
- Does it have a reasonable chance of success?”
“Just because people are willing to give you money doesn't necessarily mean you should take it.”
What do you think of crowdfunding as a route of raising finance?
Nick Holzherr: “We looked at it in the early stages and we decided not to crowdfund as you can fail very publicly, everyone sees whether you have raised money or not. There’s no negotiation on valuation and it’s actually not as easy as people think as you need a lot of people to invest in you.
“There are massive benefits if you can do it. I would one day like to crowdfund and get loads of stakeholders spreading the word about my business having just invested £10. As a route though I haven’t used crowdfunding yet as I think it’s too risky.”
Stefan Siegel: “I think it’s a great idea but certain companies wouldn’t want to look like they’re begging for cash. I think it really comes down to what your business is. I would say go out and crowdfund if you’re a product-based business but it does depend on the business idea.”
Tim Jackson: “There’s something really wonderful about taking out all of the intermediaries in the middle. For entrepreneurs looking for finance and investors looking for companies to invest, crowdfunding and similar networks are a great way of reducing the friction of great investors finding great companies.
“However, actually launching a crowdfunding campaign is a lot of work – it requires careful preparation and marketing. It’s not a case of making a video and seeing what happens. More importantly, crowdfunding investors are going to watch your six minute video and say ‘yeah that looks good I’ll back it’, so it’s easy money if you can get it and it’s great for customers but you shouldn’t assume that they’re going to add value to your company.”
“There's something really wonderful about taking out all of the intermediaries in the middle.”
To read earlier articles in this series go to one of the following: