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].