The Metrics of Fundraising from Business Angels

One way or another, right or wrong, there will probably be a cost to you to gain access to the angel investment you seek for your business – or as someone once said to me, “It costs money to get money.”

(Image Courtesy of 123rf.com)

I have always taken this sentiment at face value, having put a few businesses myself in the path of investors via paid membership to angel networks; some I have seen success and others I have not.

Unfortunately many companies place the same expectations on gaining access to a discussion for angel capital as they do to access a bank loan

But it doesn’t work that way,  here’s why…

In many instances a middle layer is involved in sifting, introducing and shaping the deal flow that is presented to investors. This layer could be a freelance intermediary, a corporate finance organisation, an online marketplace, or an angel network that brings investors together to see investment pitches. Either way, people’s time is involved and obviously there has to be a cost to pay for that time, as well as the effort, management and draw upon resources.

There is the ‘free’ DIY fundraising route and this is to be very much commended for those who know what they are doing and have a well put together offering (and I’m not just talking about the business plan when I say ‘well put together offering’). Developing one’s own investor relationships is extremely worthwhile. However, be warned that this could be slow and time consuming and at worst, you could have spent a lot of time and effort just to find out that you were a long way off from being ‘investor ready’.

If fundraising is not an imminently mission critical activity and you have the ability to put occasional time aside, developing your own pool of investors is extremely worthwhile. It will help you gauge better how your proposition will be seen by the investment community, enabling you to make tweaks and changes along the way. Alternatively, the angel networks and pitching events generally do a good job at getting your ‘investment ready’ basics out of the way and your business proposition polished up nicely.

The Resource Drain

For some time now I have wanted to look at putting some sort of estimated cost value on the resource, time and effort that is involved in the campaign approach to fundraising. In particular, two fundraising campaign approaches:

1. the in-house DIY approach and

2.  the external hire approach

I then looked to see what data I could try and attach to the two.

For the DIY route I have been able to talk to executives within a biotech company that frequently has to undertake DIY fundraising to gain VC interest, as well as their bucks, to fund their latest projects. The chart below represents an approximated cost to the business in terms of time and money. I have adjusted the salary details downwards, to fall into line with a more likely salary position of an early stage company.

The details show the amount of time two individuals (the CFO @ 75% of his time and the CEO @ 50% of his time, both on £60k salaries) spend on fund-raising.

The chart shows an estimated in-house organisational cost of £37k to release 2 people to fundraise. I ran these equations past the company and they said the salaries for more established executives in their sector would be higher. The true financial cost for them, they said, would probably by closer to £80k each time they undertake fundraising.

So this is a typical costing of the resource time and effort. Now to look at the output from a typical fundraising campaign.

Depth of Campaign

Occasionally, I take on the work of a fundraising intermediary/broker on behalf of a business that I think stacks up well for investors. This means that I sift and select business proposals/companies before presenting them to investors. It should be said that no two campaigns are the same. Some can last 2 months some 8. Some can get investment from just contacting 10 investors; some can get funded after contacting over 100. I’ll leave you with some of the results that I pulled from a recent 6-month campaign.

(Emails)

Total of emails generated between all parties (i.e Inbox total for this campaign) = 504
Total of the 504 emails that were from and to the company team = 186
Total number of emails to investment sources (504 – 186) = 318

(Investors)

Total number of investment sources contact by email (initially) = 132
Total number of angel investors approached = 77
Total number of investing groups approached (VCs & Funds, etc) = 55
Average number of emails sent to each investor source (318 / 132) = 2.4

(Contact)

(Article written for iBusiness Angel)

Average number of phone calls to each investor = 4
Average time in minutes talking to each investor source (@ 2 minutes each call) = 8
Total time spent talking to all investors (8 mins x 132 investment sources) = 1056 mins = 17.6 hours
Time spent on dead/fruitless calls – no replies, secretaries & gatekeepers (6 calls average, 30 secs each x 132 investors) = 396 mins = 6.6 hours
Total number of meetings (including 2 scoping meetings with the company to start campaign) = 18

How Many Frogs Can You Kiss In 6 Months? Early Stage Fundraising

(Written for iBusiness Angel)

Fundraising is not for the fainthearted. Anyone who has ever tried and been successful in courting angel investment will know only too well that the process of attracting investment into your company can be slow, time consuming and energy sapping. It can be an all-consuming task that can keep a person engrossed full time over a number of months. The fastest I have ever managed is 3 months (from agreeing to fundraise, to cheque in the bank for the company). Others may have been fortunate to have got funded quicker, most will be familiar with a 6-12 month fundraising period but either way you’d best assess your ability to handle the task in-house.

(Image Courtesy of 123rf.com)

It may seem obvious to state but if you are considering raising angel finance for the first time, it might be helpful to accept that you are entering a new and foreign landscape. A landscape that has its own rules and ways of working that will be different from other forms of finance that you may have accessed to date (which may have only consisted of raising a bank loan and/or some form of government grant). Imagine I had a sales job in b2c retail but then moved over to b2b software sales. I would have to familiarise myself with the differences in ways of operating and would have to get my head around all sorts of adjustments in terms of product shipping cycles, profit margins and cash flow issues. Similarly, in the equity investment sector where business angels look to part with their money for a scaleable opportunity, approaching angels for investment is not the same as approaching a bank for a loan. Just because you and your investment proposition may seem to meet all the likely criteria that an investor would look for, you can still be far far away from gaining interest and you’re stuck not really knowing why. You may feel that you have all the boxes ticked that in pre-recession times would probably get you a bank loan, but with angel investors, even if you did supposedly have all the boxes ticked with your mouth watering ‘hockey stick’ of an investment opportunity, there are a million and one reasons why you may not get funded. The general consensus is that over 95% of businesses seeking angel funding are not successful in raising early stage angel investment. Still want to give it a go?

• Do you have the resource capacity and capability to fundraise?

The fundraising process can suck you in and you may soon find that as the main force of driving your business forward growth or development suddenly take a back seat as your time and energy get deflected towards the task of courting investors. As it is often said, you first fundraise is likely to be the ‘hardest deal’ you’ll ever have to do. It’s not just the kissing of numerous frogs that is the drain but also the subsequent dating process with the ones that show interest. As I said above, try to think 6-12 months of near enough full-time activity but beware of taking your eye off the ball, i.e. the businesses development or sales targets. You may find yourself losing credibility and having to explain to investors why sales have dipped or progress has stalled. If you are an established business, be careful that the fundraising process does not put stress on the businesses cash flow position.

• There is free stuff out there – Make use of it.

For those of us in the UK, we are fortunate in that through local government business support, we currently have the ‘Business Link’ support network across the country. Make use of them as you may be able to get free, or at least discounted support. There is of course a wealth of online material that can be read and accessed for free. There are also websites that can be subscribed to via RSS feeds, as well as informative podcasts that can be downloaded via iTunes. Call this your research phase and start it early.

• Investors talk and investors remember.

It is quite common for me to send out an executive summary to an investor or investment group only for them to say something like, “Yes, I know of this company. Are they still looking? We took a look at this last year and told them to come back once they have a little more traction. Have they got any sales yet/did they get the product out?”

You don’t have unlimited ability to approach the market place. Think and act as though you only have one chance and that means don’t ‘knock out’ a business plan or executive summary with the notion that the business is best explained in a conversation. It might well be true but if your business plan does not set up your shop clearly and succinctly you may not be given the opportunity to have that phone call or meeting about your business proposal. Remember, your first shot is your best shot. You may be lucky and subsequently squeeze an investor out of nowhere but by and large, once you are in the investor domain (landscape), your name and company often get discussed (perhaps at an investment network) and in some cases investors have already come across you as your executive summary might have been emailed from one angel colleague to another.

• What are the implications if you don’t succeed?

Coming up short of the funds at the end of this process can make you seriously question whether you really have a business on your hands worth pursuing and that folding it might be a very real consideration. If you are fortunate and have the time, money to live on and inclination, you could possibly regroup and reconfigure by asking for less, changing to a different revenue model or chasing a different target audience, etc.

Or, if you can wait for the slower sales trajectory and decide instead to dig your heels in deeper, roll up your selves and resolve to grow slower via organic revenues, then maybe you can skip the ‘seed’ round and go on a year or so later to a VC or super angel A-Round (£1-4m ish). This should allow you to keep more equity for a longer period than if you’d also done the seed round first. Sometimes this is not a poor second option. It is worth noting though that businesses with some sort of traction or validation (in terms of established turnover or a decent audience size), usually come with a higher investor desirability. You may therefore find that if you tried again in 12-18 months with some ‘proof points’ ticked off, you may bring in that investment capital and expertise.

• Are there any additional fundraising options?

“Options for what?” Should be your first question because fundraising is a process and not just a question of someone opening their contact book to investors. My view is that investment readiness (IR – very often means preparing your written and numerical data) and fund-raising (FR – the activity of linking business to investment source with a view to discussing a deal’s potential) are two different specialisms but this is a whole other subject that I have blogged on elsewhere. I have a colleague who feels that between the IR and FR comes something called being ‘Deal Ready’ and I would agree with him. The problem is that the investment ready and fundraising get mixed together in the fog of the angel investment networks. These networks are a genuine route for companies to chase the skirts of business angels, some fine deals are done in these environments but there can also be an awful lot of spillage.  So, back to the point: some options you may want to consider can be found in the British Business Angels Association (BBAA) website. Look at their Directory for either Angel Networks or Professional Service Providers. If your opportunity is deemed of good quality and potential investor desirability, then you may get a fundraiser such as myself to work on success fee only. If you’re not quite ready and prossibly in the 95+% group, then be prepared to spend to get yourself into shape.

• And finally. Don’t underestimate investor feedback?

It’s not much fun if you find yourself in the 95+% bracket of business trudging round the networks hoping to spark some interest. And the reason you are t in the 95+% group? Well, something is probably wrong. It could just be that investors don’t feel that excited enough by the opportunity or its returns. It could be that they think you have overdressed the proposition and don’t give straight answers. As above… “a million and one reasons.” An investor’s “this one is not for me because …” feedback is very valuable. “Not one for me” feedback from 5 investors is immensely invaluable. If they all say similar things, then your lack of cash on the table is probably to be found somewhere in their feedback.

As always, please leave a comment. I always like to hear feedback.

Looking For Angel Investment? Don’t Do Random!

I recently received a message from an enquirer in Linked In, a really nice guy in New York asking if I knew any UK investors who might be interested in investing in his sector. How random is that?

I do empathise with his plight but it does seem a desperate lurch out in any direction in the hope that he might get that lucky investment break. There was a time, when as an entrepreneur, I approached sales and business development with this ‘scattergun’ approach. Yes I did use structure in my campaigns to reach out but in my desperate moments, I would scatter my business seeds absolutely anywhere, ‘just in case.’ This random approach, if seen by my sales target probably consigned me to the realms of the amateur. Not only was it unfocused and proportionately waisted energy but also counter productive to the market place reaction that I was trying to achieve. To use an extreme example, it would be a bit like Apple turning up at my local car boot sale with a wheelbarrow load of PCs they want to off-load at knockdown price. This would affect my perception of that company.

Unfortunately, out of good intention, there is a lot of random activity out there when it comes to founders trying to locate angel investment capital.  It’s difficult to criticise people when they are trying their best in the only way they know how but unfortunately, investors tend to have less time for approaches that seem amateurish (first impressions and all that). The problem being, if your are on your first time of looking for investment (discounting the friends and family round that may have given you start-up capital), you have so much to learn and there is very little free stuff out there to teach you. When you do venture out, you find that there’s a dearth of advisors who will claim to merrily lead you into angel investing nirvana but beware, you could be slowly moving dangerously close towards an infested pool of consultants that lurk waiting to pounce on your inexperience.

So, what to do? The so called “pay-to-pitch” networks can for some be an answer but unfortunately, there is a current reaction against (quite understandably) these networks (I touched on the issue of fees a little in my previous blog). The gist of this issue is that start-ups shouldn’t have to pay to sit in front of investors, just to ask for investment. On the face of it, it’s a very valid point. The problem being that two aspects get grouped up together under the activity of these networks, they are 1) investment readiness training and 2) access – to angel bucks. The problem is that in my experience, many of these start-ups need the investment readiness training, which is about far more than just developing your business plan. If you’ve not raised money before, someone somewhere is going to have to get you investor ready and the likelihood is it will cost a few £k to do it. When I was operating in South Wales, I did one for under £1k with Xenos, the business angel network arm of Finance Wales. Where you are in the UK, Business Link should you be able to guide you in local assistance but be wise. Ask others around you who they would rate for such input.

For entrepreneurs/founders who have a good business proposition and are clearly investor ready, then one option is to seek investment yourself. It’s an admirable thing to try and raise your own companies finance, as well as seek input from an external angel investor. In fact I would very much recommend it.

When you are ready to search for investors, don’t spend hours looking for sugar daddies in the Cayman Islands (unless there is a strategic and obvious reason to do so). Geography should be an issue, as most companies would welcome the value of a local investor being close to hand for valuable assistance and input.

It’s all about research too. Scour Linked In, looking at both individuals and groups. One trick I have found is to throw questions into the Linked In groups, making them aware that there is a company looking for investment behind the question. Speak to those who have already successfully been down this path ahead of you. Ask them if they can make any angel introductions for you.

A key aspect to being successful in fund-raising is to get to the right people; everything else is random.

Agree, or not?   >>> [always enjoy hearing the thoughts of others, so do leave a comment if you have time].

Upfront Fees vs Success Fees (Fund-Raising)

I’ve really been infuriated with the whole issue of fund-raising success fees recently. I’m sure this has been an on-going debate for years but it was brought into sharp focus by Jason Calacanis about a year ago in his blog article which blow the ‘pay-to-pitch’ networks out of the water for charging start-ups on the promise of helping them to locate investment but also for undertaking ‘investment readiness’ work on behalf of such businesses, often in the form of developing or re-working business plans. Doug Richard also joined in the debate with his own take on the issue, lambasting what he described as the ‘bottom-feeders of the angel community’ in a series of four articles – a link to the fourth one is here. I agree broadly with both Jason and Doug but I think that a few babies get thrown out with some very dirty bath water. I agree, there are consultants galore and government funded agencies that should know better, fleesing early stage business and providing very little in return. They know that they can probably help companies with the tangible work of making them ‘investment ready’ ( i.e. reworking/developing their business plan etc) but fund-raising activity is described of in the terms of exactly what it is, an inexact science or art. Fund-raising gets hidden in the tangible work of investment readiness preparation, so that it can also be charged for – upfront.

On the other side of the fence are entrepreneurs that are just not ready to have their business checked out by investors and because they hear too many “I’ve been scammed for up-front fees” tales, or fees are ALWAYS bad, they never get closer to investment capital. All this can be seen in glorious never-ending dialogue on one of the longest running linked in debates I have ever been involved in, or ever seen. It’s in a Linked in Group called ‘ENTREPRENEURS-GET FUNDED’ and is entitled “Where are funding companies available that do not charge upfront fee but only success fee?” In just around one month, this forum has been extremely lively, totalling over 130 postings.

I believe that there is a sliding scale for businesses heading towards investment capital and like most things, when you need to draw upon people’s time or effort, that usually means paying somewhere along the line. If you have time, here is how I, rather confrontationally, made my case on the above LinkedIn forum …..

“I DO NOT CHARGE UPFRONT FEES ….….. BUT IS YOUR BUSINESS GOOD ENOUGH TO BE REPRESENTED BY ME (95% ARE NOT) ?”

Last month I helped a company get the investment funds they were seeking (£200k) after 3 months of work. I tend to deal mainly with early stage, pre-revenue businesses. Here is an approximate breakdown of what happens with my inbox and the companies that ask me to help them raise finance:

5% – Businesses I chose to work with, who decide that I am also the correct fit to represent them to business angels, VCs and other investing groups. These businesses look really smart in every way when I assess them – investors usually feel the same way about them also. Not perfect propositions but really smart people, with smart ideas, big investor payback, who have tried as much as possible to validate their propositions in some way. In this climate, only the best will get funded.

30% – Business propositions from presentable people that seem to have a reasonable opportunity but I decide to not take a further look because: i) their sector is a sector I cannot make a strong enough decision upon ii) either the executive team, business plan or exit strategy do not seem strong enough. Those in this category have the possibility of getting funded if they make some changes. Most need advice to know where and how to make these changes. The changes will take time and effort and paying someone (probably up-front fees) to bring them to the necessary standard is the most realistic way for them to achieve this standard (I used to do this work for up-front fees but I am no longer interested in this category of work). Those intermediaries not asking for up-front fees (like myself) don’t want to work with such businesses because of the effort and time involved to get them ready. It makes more sense for us to look out for the 5% – as described above; especially as there is a wealth of opportunities / business plans for us to choose from.

65% – The rest all fall into the category: in-experienced, deluded and the non-investable. In short, they are the problems themselves. These are usually individuals / companies that do not realize that they are in this category and have a poor understanding of the drivers involved in the investing landscape. They usually have an aversion to paying fees (sometimes understandably if they have been shafted by a scammer) but they don’t realize they have a long way to go before they will be ‘investment ready.’ They are often seen moaning in forums like this because they can’t get close to investment capital. It is unfortunate but they have a real problem i) because they won’t pay for help to improve their proposition and expect intermediaries to take on the full risk of the fund-raising along with them, they also feel that the investing community should be configured in a different way than it actually is, or ii) because they can’t distinguish between scammers and those that can actually advance them. If you are in this category, or are not sure if you are in this category, how about approaching a ‘free-to-display’ fund-raising or fund crowd-sourcing website? I have a link to a few on my blog here: http://is.gd/dVE3F If you get nowhere, then maybe consider the fact that the investing community is not turned on to your proposition and you need a different approach or strategy.

This article, although higher up the feeding chain and from a VC perspective, touches on the same subject and is well worth a look, here http://www.theequitykicker.com/2012/02/16/kernel-column-advisors-they-dont-help-vcs-but-they-can-help-start-ups/

The following TechCrunch article features a rather limp perspective on the issue and an even more limp response on the subject but still worth a look. Here.

(As always, I appreciate the comments that you leave in this blog so feel free to leave your thoughts)

Finding & Placing Investment Deals Online

Below is a useful list of online places to post your investment opportunity (if you are a founder/entrepreneur), or to search for deal flow (if you are an angel investor). The online market place approach for facilitating a match between investors and businesses does have its shortcomings but it can still be a good meeting place for both sides of the deal flow equation.

These websites can also be useful for capital raising advisors and intermediaries like myself. The charges may not be up to the minute and my table below does not reflect whether the charge is to the founder, intermediary or investor, so you will need to explore each in turn, to see how any charges may affect you.

Also worth noting is that some of these websites have both angel and VC level investment. If you are a seed stage startup only after £50k from an investor, it would be worth enquiring how many angel investors (as opposed to VCs) they might have, before you decide to make payment. Better still, ask how many investors there might be in your region/County. There is rarely a quick fast and cheap way of locating investor cash but if you are a founder and you want to attempt to locate an investor yourself, then they are quite cost effective; or worth a punt (depending upon which way you look at it). Conversely, if you are an investor and have a bit of time on your hands, then receiving an occasional email with the latest offerings might be your preferred way of filtering deals.

If I have missed your organisation off then please feel free to make contact.

Things Investors Don’t Like To See in Your Biz’ Plan

I haven’t really done enough investment activity yet to feel that I warrant the title business angel but enough of my business partners and colleagues are and it is from my experiences working with these guys that has prompted me to put this post together. In my dealings with various investors, VC and institutional funds, I often review and discuss business plans and meet with founders to look at the proposition they are setting out. Below are some of the things I sometimes see that get the alarm bells going….

• Delusion: This is a hard one. When I am deluded, I often don’t know it and I rarely want to hear from others that I am deluded. We want to push ahead with our business vision but if we are not careful we can do so out of our own emotional attachment and at the expense of some sort of external validation that shows others feel that what we want to create is genuinely wanted.  Validation may come in the form of, customer expressions of interest,  viability of being able to actually create the working model and the greatest validation of all… sales. Investment viability delusion can manifest itself when there is very little measurement or detail in the narrative of a business plan. Lofty ideals, a great deal of marketing spin, name dropping or avoidance of plotting detailed investor returns. For me these are all clues that a particular business still has work to do before they will gain serious investor attention. Here is a fantastic website (indeed resource) called Venture Hack which talks about building just enough (the Minimum Viable Product – MVP) to get validation, before you spend too much of yours or your investor’s cash. Then after you’ve achieved the MVP, you should then try to achieve the Maximum Buyable Product – MBP, explained here.

• Lack of Realism: Bit similar to the previous point but I wanted to make another similar point. It is ok to admit the difficulties and weakness of your business proposition. I recently pointed out to a founder that he had built a whole chapter of his business plan around various 3rd party suppliers, dressing them up as though they were somehow in the company and on the payroll – trying to beef up his headcount. If you cannot describe your weaknesses, or you even avoid discussing them at all costs (because for sure they are there and investors will be expecting them), then investors may get the feeling that they will never get straight answers from you when they need them; they will perhaps feel that they will be treated to a constant stream of spin instead. Try to be open about your weaknesses (your SWOT analysis is often the place to do this) and say how you hope to address them, or at least try and demonstrate how a potential weakness might actually be a strength also. I distrust business plans which fail to talk about potential weaknesses without a degree of realism and humility.

• Product, product and more product. Some of the worst business plans are the ones that are majorly weighted towards describing the product or service in detail, with scant follow up detail on: 1. how the business will go to market (It’s a scary thing to hear a founder with technical development skills and no startup experience, only a corporate background, say how they will ‘buy in’ the operational management team, as well as sales and marketing personell) and then 2. exit and provide returns for investors. ‘Product’ is safe territory for the founder and it is quite common for a founder to wax eloquently on their product but then go lite, talking broad sweeping strokes when it comes to sales and marketing. Their enthusiasm for describing the product they have invented or dreamed up is not matched with equal detail and enthusiasm for describing both the revenue streams or how the business will exit.

• Comfortable salaries:  The exit should be the payday goal / trigger. The investor of your first round is not looking to supply a comfortable wage. Businesses that go lean and bootstrap (especially pre-revenue ones) warm the cockles of an investor’s heart. You have to show that you are in this for the long haul (or at least until the investor’s exit) and not looking for just a comfy job with a nice salary. They want to know that you will eat locusts until exit day when from thereon in you can have caviar until your heart’s desire.

• No mention of IP protection. There’s others that could write so much more on this than me but one tip I have been told is a good idea is to maybe put IP in a separate company. This is a measure which can protect the IP in the event of a fail and therefore the assets of a company will be protected. Either way, make sure you have both a short term IP strategy that looks to procure revenues from IP opportunities and a long term strategy that positions and tempts any future investors or trade sale partners for IP acquisitions.

• Big picture vision but no detail. No ‘from here to there.’ Some entrepreneurs are lucky, their vision is really game changing and their pedigree would mean that investors might be willing to buy into their vision, even if they only have a broad outline of how to revenue it. For the rest of us we have to convince, cajole and persuade by means of endless due diligence rounds, questionings and presentations of various data, showing that we know how every bit of revenue will be made and from which revenue streams, why the monthly burn rate is so high and why we think we will get 1000 customers in month 4 and not just 500. It’s not about proving the accuracy of these facts because at the end of the day they will only be predictions. It is more about showing that you have tried to benchmark against other available information – perhaps a previous startup that has built a business in much the same way as you are planning to.

• Skin in the game – Are you investing also? Recently I spoke to a founder that wanted me to locate a sum from investors for a niche employment website. He had built a prototype and built a small following that had expressed membership interest in his website idea. He told me that he had no capital and could not put any money into the development process alongside an investor. My reply was that this might be a tall ask if he was putting ‘no skin in the game.’ I suggested that it might be possible if he could split the investment required into 2 tanches, the second being triggered on him hitting a sales target. The founder almost went pale when he realised that he would actually have to get close to the sales figures he had put in his business plan, otherwise his business would fold. It made me realise that the founder probably didn’t really feel the sales targets were achievable. Performance related investment – a common tool of the investor.
• Stratospheric Thinking – (I’ve added this one at a later date to the original post). I only see this one occasionally but it’s definitely worth a mention. It happens when founders try to impress that they are ready NOW to take over the world and bring about world domination in their sector or business area. The business plan majors heavily on the organisational components and structuring, with plenty of comment on various holding companies and partnering organisations all fitting together to provide a monster big organisation that by sheer size and gravitas will assume its place on the high table. The subtext with this approach almost says, “something big is happening here so jump onboard quick or you’ll miss out.” Or “the numbers and plans being made here are so big that even if we are out a little in our calculations, there’s enough excess to not worry about the detail of the business plan so much.”

I hope this has been an interesting read and I’d be interested to hear any thoughts or experiences from anyone who has read this.

Summer Shoots – Early Stage Seed Funds

With news that we are officially out of the recession, barring of course a dose of double-dipping, it is welcome news to hear of a few new (predominantly) tech funds that have appeared over the Summer months, both in the UK and US. I picked up in a previous blog that some VCs were either 1) playing safe doing M&As and not reinvesting for the time being, or 2) beginning to play at the earlier stage of the venturing chain. It is now the time for those at the more fearless entrepreneurial end of the scale to start laying their cards on the table. There is a sense that despite all else that is going on, why should a downturn prevent us from getting on and making things happen. When there is a downturn, there sure to be a little bit of upturn somewhere. You just have to work harder and smarter while the deadwood is being cleared away.

Over the Summer there has been a lot of activity in early stage seed investing from Sequoia and Spark Ventures. Additionally, Step5 Ventures is the latest early stage fund to launch of which an article can be seen here.

Just in also recently are two very significant UK funds, Ace and ProFounders.

Fundraising & Startups

They say that a downturn is the best time to get your startup going, so I have gathered together a few good links below with a few thoughts on this topic. This article will also push out a few thoughts on approaching fundraising. There is a lot out there on this topic but I want to give a slightly different perspective and look at it from the people/person that assist the companies in securing their investment.

5 Startup Myths

The first link is a website called ‘Small Business Trends’ which was sent from my Google Alerts and I have chosen it because it approaches the subject by debunking some prevalent startup myths. The Small Business Trends article can be found here.

First Time Fundraising

If you’ve never really approached fund raising for your business outside of bank loans or an overdraft, then you probably have a lot of new ground to cover. Perhaps you are considering trying to secure private investment from business angels; ‘trying’ very definitely be the operative word as you embark on trying to convince an investor that they can make stacks of money with your highly lucrative business proposition.

Bootstrapping

Before you start entering into such conversations, let’s look under the hood a little first, just to make sure your approach to business will not scare off investors upon first sight. Are you operating a lean operation by ‘bootstrapping’ your business and keeping your operating costs as low as possible? Here is a good article (from a new media/new tech perspective) by ReadWriteWeb on Bootstrapping. Then there’s this article too from Doug Richard on how to survive a downturn (it’s mainly for established businesses but has some good general nuggets that can be applied by startups and established businesses alike). Guy Kawasaki of Garage Ventures shows why taking a bootstrapped plan b to VCs is much better, here. And finally, some good nuggets here too. For an alternative (anti) look at bootstrapping, see here.

Investment Ready?

Ok, so your now operating lean, you’ve pulled back the operating costs and believe that private investment is the way forward towards your hockey stick growth curve (see point number 3). First big lesson, private investment is not a variation of getting a bank loan, i.e. you can meet all the criteria for a bank loan and have a reasonable expectation that you will get your loan. With private investment there are numerous reasons why you might not get the investor’s cash, even when you can successfully tick all the given criteria. For example, the returns might not be high enough, they might disagree with you on how big the size of market share is, they might not believe in you or your team that you can deliver what the business plan says, or, they just might get an itch that you might not get on well together. Getting equity investment can be a lengthy, time consuming and in many cases, fruitless task. They might love you, love your product, believe in the exponential growth potential forecasts but the whole process can go belly up once the due diligence process kicks in.

Another point worth taking note of is that in most cases it will cost you money to get money, unless you have managed to get direct access to a range of ‘high net worth‘ or ‘sophisticated‘ investors, you will have to go through intermediaries and they will want paying for their work. Typically, they often take around a 5% ‘success fee’ for funds secured. There may also be fees for additional work undertaken, depending on whether you work with an agent like me, or with one of the angels network.

I would also advise against thinking that all that is needed is for your business plan to be thrown out there to land in the inbox of multiple investors. It’s more than just emailing your businesses plan (or executive summary) out to a database of investors. Investors are too busy to look at numerous business plans every week. Someone somewhere has to be paid to soft through them all and pick out the good ones. Investors also rely and prefer often to work via recommendations. Even if you are one of the good ones, you still have a million and one reasons why even after being successful in getting a pitch opportunity, you might still not get the money.

[I have a lot more written on this. If a get one or two requests (comments can be added below) then I might consider putting more in here on this subject, or do feel to contact me personally about this].

Some thoughts

• Realise that it costs money to get money.

• Most (over 90%) businesses that apply for investment, don’t get invested in. You might need to: try – fail – make adjustments – try again.

• Have you or the other Directors put money into the business also? This is kind of expected and gives investors a degree of comfort to know that you believe so much in this venture that you have put your own money in also.

• If there is IP, have you taken steps to protect it?

• Have you got a ‘plan b’ in case you get partially funded, could you roll out in stages instead?

The VC Shuffle

This article was originally published in May 2009. Today (March 2010) I came across an excellent article ‘The Emergence of VC/Angel Syndicates‘ that digs around the issue a little more. Full article here.

Parts of the VC sector have responded to the economic situation by downsizing, or more precisely, by moving into early stage activity. It has become tough for VC firms to find enough M&A and latter stage deal-flow activity that a number of organisations are looking to generate opportunities at the other end of the venturing spectrum. The following excellent article gives very recent activity status and charts the drop in VC activity, even over recent weeks. It’s all stateside but to an extent I am sure we can expect to see a mirroring of this activity in Europe too. Just like us, American’s are prone to propping up both decaying industries and unsustainable levels of business but what they do do as second nature in times of recession, is innovate or lead with entrepreneurial endeavor. President Obama has pledged $250 million a year in federal funds to seed a regional network of incubators organizations, an effort aimed at growing jobs and innovation.

See the article here.

As the VC press have little M&A or IPO news to report on, it seems that VC activity focused on early stage venturing is getting some prime coverage. Below is a great article on VCs that have invested into seed funds, accelerator programes and incubators.

Full article is here.

VCs Moving Upstream

I’m not sure of what to make of recent activity in certain quarters of the VC community but some VCs are delving into the messier and murkier business (at least in terms of traditional VC activity) of early stage risk capital, Spark Capital being the latest with their new seed fund.  I know there are numerous reasons why they tend not to get involved in seed and early stage investing (VC and angel funding are two totally different beasts and require divergent business skills to undertake) but I think it totally makes sense. I liken it to the situation in the football Premiership whereby many of the top clubs have lower league feeder clubs nurturing talent for them. 

I think it shows that some VCs are very aware of current activity and gains to be had in the digital and TMT (technology, media and telecoms) sectors and with last week’s news of the latest foray into seed funding coming from Spark Capital, those with both the funds and foresight know that if you are in a position to invest now, then it is a great time to sow ‘your own‘ seeds for the future. There’s a world of difference between VC and angel/seed investing, so why not just buy into a group who operate at the seed level, an outfit that has the potential to spot the Google, Facebook, Twitter etc of tomorrow.

Previous moves of a similar nature have been from Sequoia Capital investing $2m into Y-Combinator and (I believe but am not quite sure) Index Ventures into Seedcamp. Here’s a bunch of articles on the Sequoia and Spark buy-ins:

• Technorati on the Sequoia investment.
• XConomy on the Sequoia investment.
• TechCrunch on the Sequoia investment.
• Paid Content on the Sequoia investment.
• Y-C’s Hacker News on their new investment.

 

• Tech News on Spark’s buy-in.
• TechCrunch on Spark’s buy-in.