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.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.