This Blog takes a pragmatic look at the options to raise money both at the start-up stage and at the high growth stage. Although the title refers to raising money, I’m also going to explore whether there is a need to raise money and I’ll share a couple of specific examples of businesses that I’ve been, and am, involved with to show you two alternatives to looking for investment.
Do you need to raise money?
From the outset, you need to think very carefully about what your strategy is. I meet many different entrepreneurs and often there isn’t even a question in their minds over whether they need to raise money, they feel that they need to raise reasonably substantial amounts of money to get their business going. But you need to look carefully as to whether that’s actually the case.
There are some entrepreneurs who do need to raise money because of what they want to do, the products they’re creating, and the speed with which they want to grow. However, it’s important to think about whether you can still reach high growth pretty quickly without raising those funds at this early stage.
For example, as a startup, you have to think about what funds you need or whether you can do it on a shoestring – I talked in a previous blog about how you can grow a startup very effectively without needing a lot of money upfront.
Once you pass the startup stage and you’ve got a solid platform with a business that’s working well and you really want to go for it in terms of growth, it’s also important to think of the different kinds of options you have available.
With any business, I believe the strategy has to be one where you concentrate on moving into profitability as soon as possible.
Start with the basics
Moving into profitability as quickly as possible involves cost control. You can’t spend oodles of money from the outset because you’ll soon run out. You also have to look at how you reward your team to make sure that they’re motivated. Of the two, cost control is absolutely essential at these critical periods of your company’s growth.
Essentially you have to get the basics of the business right before you consider what your strategy is in terms of whether you need to raise money or whether you grow organically and reinvest the profits you make back into the business. Clearly, if you move into profitability quickly then you can reinvest those profits and use the money to grow the business, take on new people, particularly at a higher level, and bring in some extra support or whatever it is you need to grow your business. You’ll be in the best position to do all of this if you go down this route and can become profitable quickly, because you probably won’t need to raise as much money, if any, as a company that isn’t able to become profitable as quickly.
Consider the times
You also have to take into account the times, as it were. The reality with COVID at the moment is that it’s really difficult to raise money because a lot of the investors out there are using their money to triage the companies that they already have.
The world has changed pretty quickly, almost overnight, and some will do very well out of that because they’ve been able to seize upon some of the advantages of the situation and have been able to adapt to the changes. However, there will be other companies, such as those in the entertainment industry, that are having a really tough time and at this stage, it’s all about surviving. In areas like entertainment, travel or leisure it’s really hard to raise money at this point in time.
What are the options for raising money upfront as a startup?
There are plenty of good reasons why a company won’t be profitable quickly and in this case, your strategy has to be to raise the money to grow. There are a number of ways to raise money and the most suitable will depend on the stage that your business is at.
If you’re a startup, you could borrow money from friends and family. I started my business in 2001 with a £15,000 loan from my parents, which I had to pay back because that was a sizable amount of money for them. Many startups look to friends and family to raise money.
There’s also a company that we’ve worked with in the past at thestartupfactory.tech that wanted to build financial services products. They came to us having raised a sizable amount of money from friends and family, but it still wasn’t enough to do what they wanted to do. This is where we were able to help at thestartupfactory.tech because we can help companies build the first iteration of their product to an MVP (minimum viable product) or maybe a 1.0 version, in return for a reduced cash fee and a small equity stake.
These are two examples of how you can raise money upfront, using companies like thestartupfactory.tech or through friends and family.
Another option is to look at seed funding and going through business angels in particular. The issue at this stage of your development, however, is that you are a high risk no matter how good you think your idea is. As a result, I think quite a few entrepreneurs are surprised by the amount of equity that a business angel or seed investor wants in return for what is, in reality, probably a relatively small sum of money in the grand scheme of things just to get you up and running. That means you need to think very carefully as to whether you want to go down the seed funding route, or whether you can manage to do it through friends and family.
In some ways, raising money through friends and family is probably going to be better because you aren’t going to have to give quite as much equity away, if any, depending on the situation. However, that brings pressures in itself because you really don’t want the business to fail and you want to not only pay your friends and family back but also for them to do well out of their investment.
I’m also developing a business at the moment that will be a legal document platform providing consumers with the ability to have self-service online access to certain contractual legal documents. The business model we’ve worked out is such that once this product is built, it becomes self-funding almost immediately. Hopefully, it will generate reasonably significant amounts of cash, but we do need quite a bit of capital to get the business up and running because it’s a product that we have to build.
We have that money in place and in this instance, we haven’t gone to an institution. We’ve used what I class as friends and family fundraising, and once the product is built we have a route to market which we believe will generate plenty of cash that will enable us to grow the business organically from that point onwards.
In this situation, the investment is all upfront but it hasn’t really eaten into the equity. We’re building a small team at the moment and because we haven’t given away equity, we are able to look at some kind of equity reward for key team members. That helps to keep our costs under control in terms of salaries and rewards but still incentivises the team.
Now, there’s nothing wrong with going to a business angel or some kind of seed funding organisation. However, the problem can be that if you give too much of your equity away at this early stage then it weakens your position if you do need to raise serious money further down the line. Giving away too much equity in your business can lead to two issues. The first is that you don’t have enough left to raise extra money that you may need in the future and the second is that you don’t leave yourself enough of a percentage in the pot to make putting all the blood, sweat and tears into this enterprise for the next few years worthwhile.
As a result, I would advise you to think carefully about going down this route. There are very good reasons for going down the route of seed funding and business angels and it definitely works for some companies, but you do have to think hard as to whether it’s something you need to do or whether you can avoid it. If you can avoid it, you should, and focus on moving into profitability as soon as possible to allow you to reinvest those profits into the business.
A non-executive director gave me some advice when I was at a previous company and I was considering giving a little too much equity away to team members. He checked me on it and made me think about it, and I’ll always be grateful for that because it was a really important piece of advice. He said that you need to have enough of an interest in the company that you’re going to grow, put everything into and probably risk quite a bit as well along the way, and you should be rewarded for that.
How to raise funds once your business is up and running
Once you get past the startup stage and you’ve got a really solid platform for growth, you might be looking to take the next steps. At this point, you should be making a profit or be very close to making a profit. You’ll have a senior team who support your skill set so that when you do grow, you can grow very quickly with the senior hires in place and only have to worry about hiring and managing the teams beneath them to actually get the work done. Remember that it’s always easier to hire more junior team members than it is to hire the right senior people.
Once you’ve got this solid base and your idea is proven and beginning to work, you have to think about how you’re going to move forward.
Your strategy will depend on the type of business you have and how well it’s going. If you’re making reasonable money and a reasonable profit, you can reinvest that profit and use that as funding to grow. That’s absolutely the best way of doing it.
The other thing to take into account at this stage is keeping your costs under control. As you begin to make money, it’s easy to start spending more money and you really need to think carefully about what you’re spending and keep a tight hold of the purse strings. I’d say that every six months you should look at what you’re spending money on and take out the excess costs.
If there’s a service that’s not giving you value or there’s something you’re not using, get rid of it. Maybe there’s a better value option for doing something, so move. Although that route to growth might be slightly slower if you’re reinvesting your profit, you are hanging onto your equity or you’re not having to pay the money back that you may have borrowed.
You have to evaluate whether this is the right thing for your business and whether this strategy allows you to grow quickly enough to satisfy the opportunity and your thirst for growth.
If it doesn’t, you may need to get some additional funding to support that high growth. At this stage, there are two main types of funding that you could go for. One is based on giving equity in your company away and the other is getting a loan. My advice is that, wherever possible, look at getting a business loan. This is what Cake did.
When we produced our three-year plan, we had quite a bit of money in the bank but we decided to go for some additional funding just to make sure that not only did we have funding for what we wanted to do over the next three years, but also to make sure we had rainy day money in case something went wrong along the way.
We had grown organically for most of our life, but at this stage, we wanted to really push for high growth. We had a seven-figure sum in the bank, but we felt that we would need all of that to push for the growth we were aiming for based on our projections. Our aim was to ten times most of the parameters within our business in that three-year period and we were concerned that what we had might not be enough, or it might not be enough to be safe. We submitted a funding application to a well-known funder in the north-west and after a relatively simple process secure the additional money we required.
So, that’s an example of where we felt we did need some extra funding and how we sourced that funding without giving any equity in the company away.
This idea of having a buffer for a rainy day is important and COVID showed just how important it can be. No one saw that coming. Within three months we went from an economy that was actually pretty healthy to one that was 30-50% shut down with millions and millions of people on furlough and the government racking up billions in debt that at some point we’re going to have to pay back.
If your business isn’t suitable for a loan or the size of loan you require, the alternative is to look at giving some equity away. In this situation, you have to be really sensible and make sure that you don’t give so much of your equity away that you run into difficulties later on. Giving away too much equity may hamper your ability to make raise money further down the line. There is also the risk that you don’t have enough of a percentage left in the pot to make it worth your while putting everything into growing the business for the next few years.
Whatever option you choose, control your costs
There are lots of strategies for a startup or a more established company going into high growth that you could look at to make sure that you have the money you need to go through that high-growth period. That may mean borrowing money, it may be reinvesting all your profit or it may mean both. Whatever it is, you have to think carefully, make a decision, go with it and be confident in what you’re doing.
The most important thing, whatever route you go down, is to keep tight control on your costs, because if something doesn’t work and you have to pivot then for a period of time you’re going to be short on cash. The cost control that you have in place will be really important and your rainy-day money might be really important to make sure you don’t go bust and run out of money in the middle of the pivot.
Even though the potential for a business might be massive, so many companies go bankrupt simply because they just run out of cash. They may be pretty profitable, but that won’t save them if they don’t have money in the bank.
Picking the right funding option both at the start-up stage and during a high growth period is never an easy decision. You just have to carefully evaluate what’s going to be best for your company at that particular point. As well as trusting your instincts where possible discuss the situation with a trusted advisor, someone with the badges and scars from similar situations.