Finding investment for your business isn’t just about working with anybody willing to give you money. Just as you’ll appeal to investors looking for a business proposition just like yours, so some investors will be more compatible with your company than others.
It doesn’t matter how fantastic your offering is; connecting to the most suitable sources of investment isn’t about throwing out a net and hauling the investors in, regardless of where they come from. You need a smarter strategy than that.
There are a lot of different kinds of investors out there. For example, if you are at a start-up or scale-up phase, Angel investors may be the right people to approach for funding your start-up.
However, Angel investors are far from the only game in town. There are a lot of other sources of investment out there too.
Crowdfunding has become increasingly popular over the last few years, to the point that it is now the second most prevalent form of raising investment for start-up and early scale-up businesses. Now Investors have seen how successful crowdfunded businesses can be, they’ve also become more confident about investing more significant sums of money through crowdfunding platforms. The fact that crowdfunding is all about harnessing the power of the crowd to make investing in your business easier hasn’t hurt either. Most investors believe there’s safety in numbers.
How does crowdfunding work?
Crowdfunding platforms are relatively straightforward. In return for a small commission on the amount raised, they’ll manage most of the technicalities and legalities of the deal. That works perfectly for less sophisticated investors because it means they can invest relatively small amounts in your business without having to jump through hoops to close the deal. It can work perfectly for your business as well, because it means you can leverage your existing networks and allow your customers to own part of your company. As BrewDog discovered when they used the crowdfunding platform Crowdcube to raise money for their craft brewery company, crowdfunding can result in a highly lucrative win-win situation. That’s why they’ve gone back to crowdfunding several times, raised millions of pounds in the process, and built a fan base that’s massively increased their brand loyalty.
If you’re seeking crowdfunding in the UK, two of the largest platforms to consider are Crowdcube and Seedrs. However, it’s not as simple as just signing up to those sites and then sitting back while the money rolls in. Crowdcube and Seedrs have very similar criteria to Angel investors in that, before they accept you onto the platform, they’ll want to be assured that your business has a credible plan and is followed by a strong community that is likely to invest in you. They’ll also expect you to have some initial investment already committed to your round, so you’ll probably need to attract a few Angel investors before crowdfunding becomes a genuine possibility.
Venture Capitalist are institutional investors. They’ve got a lot of money to invest, but they’ll generally only be looking at later stage companies that already have sustained revenues and an established customer base. For VCs, it’s all about investing large injections of capital in businesses that can grow rapidly and reward them with higher-than-average returns. A typical VC investment could be anywhere between £2m and £15m or maybe even more. There’s recently been a trend where VCs will back deals of extremely high value, but the flip side is that they’ll fund a lot fewer deals during the year. There are currently over 200 VC firms in the UK, averaging just 500 deals per year between them.
However, the good news is that–because of the trend to back deals of higher value–a new breed of VC has started to appear that’s focused on bridging the gap between Angel and Venture Capital investment. ‘Early Stage VCs’ have formed a new category of venture capital in recent years.
Applying to a VC
Unsurprisingly (because you’re dealing with an institutional investor), applying to a VC is a lot more formal than applying to an Angel. Your pitch will be reviewed by an investment analyst who, if they’re happy with what you’re showing them, will pass it up to a senior analyst or investment manager for closer inspection. If your pitch survives their review, they’ll invite you in for a meeting, and then several more meetings will almost surely follow. If all continues to go well, your proposal will eventually be taken to an investment committee for their final decision. Sometimes, you might even be asked to pitch to the investment committee.
It can be a long, anxiety-inducing journey. Still, if you’ve taken our advice and reassessed and refined your investment pitch to the nth degree, you’ll be way ahead of your competition and much more likely to reach the finish line successfully.
Private equity firms play it safer by investing in more established companies that are approaching the end of the scale-up phase. They’ll typically invest £50m and more in a single deal, with the aim of buying your business and adding it to a fund composed of many other different investments. Once the fund reaches a specific value, they’ll sell all the businesses within it to provide a return to their investors. If you’re currently in the start-up or early scale-up phase, you almost certainly won’t have to think about private equity for quite a while.
Brokers and Investor Relations
Brokers and Investor Relations agents aren’t a direct source of funding for themselves, but they could be extremely useful to you in the right circumstances.
For example, if you don’t want to take the time to pursue investors, or if you’re finding it challenging to meet and secure pitches with investors, a broker will thumb through their database of contacts and source deals on your behalf. In return, they’ll charge a fee for every successful investment they bring in, and they may also charge a small retainer for their services.
On the other hand, Investor Relations have more in common with a Public Relations company. They’ll manage your marketing, communications, and investor-specific PR and facilitate effective contact between you and the investment community. Only you can decide whether that approach will be right for you and your business.
If you’d like to talk further about raising investment for your start-up business, please get in touch. If you are looking for more advice on winning over investors, download a copy of Robot Mascot COO James Church’s best-selling book ‘Investable Entrepreneur’ here.