Summertime is famously quiet in the deals market - sell in May and go away as the old saying runs. While this is true in that few deals close and very little money changes hands, the sunshine and showers still bring out many conversations about fundraising in the Startup world. I have met with at least five interesting founders who are preparing to pitch for capital in the autumn over the past few weeks.
Each approach is different and the amounts, purposes and frankly quality of the prospective investments varies widely. They have one thing in common, all have reached a narrow conclusion about the source of funding to pursue. Some have considered other options in detail, some barely at all. At some point it is necessary to target a clear pool of potential investment but these chats have made me think that it might also be worth restating the breadth of options that are available to start with.
The first source for most people is bootstrapping. This is a funky word for using your own money or cash you can raise from immediate friends and family. On the plus side, you will retain complete control of your business and all the returns will flow to you. You will also be taking on all the risk and unless you are very fortunate, the total amount of capital available will be limited. Nonetheless, it is always worth asking whether you can bootstrap to the next stage.
People are giving it away
Many of the entrepreneurs I know have supplemented their initial funds by entering the wide range of Startup funding competitions and/ or applying for grants and accelerator or incubator support. We are well served in all three categories here in Scotland and the largest competition fund for Startups, the Scottish Edge Awards, has just received a boost from Sir Tom Hunter who is putting up £700,000 alongside the fund of £2.5 million committed by RBS. Between them these types of funding are a great way to progress from a business idea through to something that is at least viable. Becoming involved with accelerators or incubators can also be a great way of building your network and even extending your founding team.
Choirs of angels
If and when a Startup needs external funding the first port of call in many cases is business angels. In many cases this is just a small group of people, usually experienced business people, who have some reasonably serious cash to spare. One of the great benefits of this type of funding is that it often brings much needed experience, contacts and expertise as well as the hard cash. In the UK the angels can also benefit from substantial tax benefits in the form of EIS and Seed EIS.
Not every founder has a book of contacts containing the names of a bunch of people flush with cash. Fortunately many angels have also joined together in syndicates. The formality of these groups varies considerably from a very clubbable feel to something very close to a VC fund. In all cases they provide a single point of contact who can access funds from a group of investors. You will still need to convince enough of those investors with your pitch but it can be easier than finding your own group of investors. However, many syndicates also charge fees and the level of support and advice provided varies considerably so this solution is not for everyone.
In Scotland, business angels and especially angel syndicates can also provide access to an even deeper pool of funds through the Scottish Investment Bank an arm of Scottish Enterprise. SIB acts as an investor in its own right but in most cases it uses a process called matching to provide an amount of funds equal to that raised by angels. Most of the main angel syndicates are approved matching partners so the process can be very simple.
Smart money or following the crowd?
Of course in all of these investment cases, the investor will expect a share in the company. Deals vary widely but something between 10 and 25% is normal. This means your investors are also partners in the success of your business which in turn means that you will need to work with them for the long term. In many cases, this is a great relationship but it pays to be choosy about who invests. Resist the temptation to take the first offer of cash because finding the right people to work with is just as important as raising the money.
Some businesses avoid the relationship element altogether by pursuing the crowd funding approach. With the arrival of equity crowd funding options this is now practical for many more Startups. In practice, most of the successful sites are pretty busy so it can be hard to stand out. Typically the crowd does not bring the types of networks and experience that angels or syndicates bring so it is not smart money. Despite these drawbacks, it is a real option for many founders. Where a consumer product is involved it may also be a great source of initial customers and a way of testing out pricing and feature options. The costs and fees involved tend to be pretty similar to most angel syndicates. In fact some of the best known crowd funding options are effectively angel syndicates put together on a deal by deal basis.
Keep the whole pie
Not everyone wants to sell part of the equity in their business. Two other options remain. One is loan funding. This can be very tough in the present climate with banks unwilling to lend even to established businesses. There are some publicly sponsored schemes, for example the West of Scotland Loan Fund, which offer attractive rates and may be easier to access. The Scottish Edge Fund is also introducing a loan element.
Alternatively, your business could generate enough cash to fund itself to growth. This is not easy and will not be possible in every case. There is almost an unspoken assumption nowadays that a successful early stage business will not make any money. I have seen many business plans where this is indeed true and the founders need to build a huge market first before worrying about profit. There are exceptions though and it is worth thinking through whether your business might fit in this category.
You can choose the road to take
All of these options may only take you so far. Once a business reaches a certain value then serious money comes into play - Venture Capital, Private Equity, Listings and major Trade Sales. Often these options are exits for both founders and angel investors but not always. If you want to be the CEO of a global giant then you will stick with it through one or more of these stages as well. Whatever you do with your business, it is worth considering all your options at every stage.
Even more than winning, Startups are exhorted to action, to Go Do. It was one of the key qualities I highlighted in my blog about what makes a great Startup team a couple of weeks ago. Numerous writers and successful founders talk about a bias towards action. Others go further. It is better to do the wrong thing than to do nothing. The Lean Startup and other well regarded theories have brought forward the idea of experimentation and iteration. Basically, succeeding by doing stuff, checking it and then doing it better. This mindset has replaced traditional planning and testing for many.
I am totally with this movement and I am a big believer that traditional corporates need to get some of this urgency into their own organisations. But like anything, Just Do It is not a complete answer. There has to be some time for reflection, consultation, considered judgement otherwise we risk becoming hamsters spinning our wheels ever faster and going nowhere. How can we strike this balance?
Action and reaction
Start with action. Things have to get done. Founders and Entrepreneurs get twitchy when they are not making stuff happen. Actually things are a little more complex. Do something, measure or review the result, learn and then do the next thing is more realistic. This mini cycle tends to get swamped in the early stages because everyone in the team is doing multiple things at a frenetic pace so covering all four steps of the cycle for different activities all at the same time (that’s how Startups fill the time between pizzas folks.)
So we are actually doing some thinking and adjusting all the time. Business also needs some deeper thoughts though. To stick with Startup language, when and how to pivot? When and how much funding to raise? Where to spend that money when you have it in the bank? What is the best balance between more development and more marketing? These types of questions are fed by the learning we take from multiple actions but they are not easily answered from individual outcomes.
Set the clock
Most Startup teams I know recognise this and try to find time for some deeper thinking. Senior executives in the corporate world face the same problem. Many of their hands on actions may be delegated to their teams but reviewing the outcome of multiple streams of activity and deciding the next step is also very different from strategic reflection.
I have seen three basic approaches to making the time. Most common in the corporate world is to carve out set times on an agreed cycle. Annual strategy away days are common and there are also examples of CEOs who carve out an entire week of “white space” on a regular basis. This is good discipline and the tools and approaches taken can be very valuable. However, determining a schedule in the Startup world is very different. There is no predictable cycle to the business so 6 months time could be too late or too soon.
Pull the trigger
Another approach is to build time around key triggers. These could be foreseeable in advance like a new round of funding, or arrive out of the blue, an offer to licence your product internationally for example. I think this approach has plenty of merit and is probably necessary in a lot of circumstances. It works less well in the corporate world where the trigger is usually a crisis, a big drop in sales or a major new initiative by a competitor for example. The “reflection” then often smacks of panic and the result is often action for action’s sake.
The brave will rely on their gut. A sort of fartlek approach to strategy. When it feels right, maybe because of an accumulation of small things, a big shock in the outside world or just a sense of things being a little jaded, the great leaders will stimulate thinking and change only if deeper analysis says this is the right way to go. Putting your foot on the ball in this way will be a hard decision to make but don’t be afraid to try it. Many things in a Startup depend on the gut instinct of the founder so it pays to use it.
Find your torch
The balance will almost always be towards action but pauses for thought are essential. I have no easy answer to when and how to do this. I would suggest keeping your mind open as far as possible. Find time to read widely, fiction and non fiction, not directly business related. Network with people because they are fun and interesting not just useful. Exercise and use the time to allow your mind to wander and ponder. Allow yourself to be broad as well as focused - at least a little bit.
Every business needs to win. Successful people are winners. Great teams are defined by winning. Consultants and analysts strive to tell us who the winners will be from new trends or technologies. Speakers break the ice by asking their audience “Who wants to be a winner?” Business school professors and ex CEOs offer us strategies called “Playing to Win” or something similar. Sports stars and military commanders are hired as icons and role models.
Winning becomes a tool to motivate people. Sales teams, finance teams and procurement teams develop initiatives called “Winning in the marketplace” or “Refuse to lose.” Office walls are covered with cute posters repeating mantras like “Get ahead of the game” or “Winning is an attitude.” New recruits are urged to join the winning team and old lags are measured by Win/Loss Ratios. Commercial and business success is surely all about winning.
Business is not a zero sum game
This is misleading, narrow and wrong. One of the growing cliches of the Startup movement is “Not a zero sum game.” This is the fundamental truth of business. Peter Drucker said the only valid definition of business purpose is “to create a customer.” We create a customer by adding value not by beating someone else. A much older cliche is “win win.” This captures a fundamental truth you must create value for customers to make a business. You must create value within the business to survive and succeed.
Pitch for customers not for victory
Even in competitive pitches winning is not the overriding objective. Where more than one company is bidding for a sale of whatever kind it is easy to focus on beating the others to “win” the business. But remember, this means you are thinking about your “opposition” not on your customer. Being customer focused means all the time not just when you have the time. Develop your pitch by thinking about your customer. How can you add the maximum value? What is the most effective way to show your customer that value? Where is the additional value your offering brings?
For a Startup pitching for funds has similar challenges. It can feel like a battle. An increasing amount of money is on offer through events that are overtly staged as competitions. Both funding pitches and sales pitches are two way dialogues. Do you really want these people as investors? Which should you present the true heart of your business or the version that convinces the competition judges? How strong will the relationship be after the pitch if you opt for the latter?
What happens if you win?
Think about this from the perspective of a battle. The greatest generals and statesmen are not just about winning the battle. They work to the strategic objective of the campaign or the defining mission of their cause. Those who simply fight to win find themselves flying the flag over a bloody field and wondering what to do next. The same is true in a business context. Imagine winning the money in a pitching competition. How to spend it? What does the awarding body expect? How can I keep my investors happy? Far better to be asking: How can I find customers, show them how I solve a real world problem and deliver my product or service to them in an awesome way? Then spend the money on those activities which most directly contribute to those outcomes.
How do you want to be remembered?
Let me ask one final question. What do you want to be remembered for? Is your legacy to be the market leader or the biggest winner? Or would you prefer that your product was loved and desired. Your business was venerated and admired. Your people were sought out and lauded. This is the real truth behind the zero sum concept. Startups are not just about making money. They are about adding value by solving real world problems. My best memories from my career are not from winning the big bid. They are from delivering the greatest change and value for my clients. The great founding teams and entrepreneurs change the world, any success will at least change the lives of your customers.
Teaming with Startups
Having written about teams last week, I found myself attending an Informatics Ventures event titled “Teaming with Startups” at in Glasgow this week. It was another excellent event from Danny, Ronnie and the team and I must add a word for the venue. The Inovo building in George Street looks like an excellent new facility. It has been renamed Scotland House and is the headquarters of Team Scotland during the Commonwealth Games so it had an extra something special for the day.
The speakers included John Innes, former CEO of Amor Group and a number of promising early stage companies. As it turned out, much of the theme was actually about bringing in new people as opposed to forming founding teams. I thought it would be worth sharing some thoughts this week on hiring great people, including some useful advice from the speakers at the event.
We all make mistakes
Hiring is a tough part of leadership. I have lived and worked through at least three major recessions and even in the toughest economic times there is always a shortage of good people. Good people also tend to be loyal and successful so they are not often on the market even when you do find them. As a consequence, even the best of us are prone to make mistakes.
I often used to share a beer and a laugh with a group of senior partners from my previous firm talking about the worst recruitment errors each of us had made. A good friend of mine was generally the winner when he reminded us of the guy he hired on a six figure salary who did not sell a single pound’s worth of work or bill a single hour in two years.
The Cardinal Sins of Recruitment
When the talk turned serious, it usually boiled down to three core mistakes, all common and all fatal:
Hiring is a strategic priority
In the end there is no substitute for spending time talking to potential recruits. I am not a huge fan of the word interview. This is not a one way process. Especially in a Startup environment but in truth in any worthwhile job the new recruit is taking as much, maybe more risk than the hiring company. Of course, this makes the process time consuming. Do not be afraid to spend the time. This is strategic investment just as much as product development or marketing plans. In fact hiring and developing the right people is the best investment you can make.
Interview, interview, interview. At the end whatever notes you have, ask yourself one question “will it be fun having this person as part of your team?” Yes is the only answer that works.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.