Should My Business Be Raising Funds? 💰
Every start-up has different requirements, but a key consideration is whether or not to fundraise.
As a founder of a business, I’m constantly weighing up my options. Whilst I’m acutely aware that money can accelerate the growth rate of my company, it’s not necessarily the right thing to do. I’m not alone in thinking this as many entrepreneurs seek out early stage funding to accelerate their ideas and scale-up their businesses. Below are some common questions asked by founders when raising funding.
What are my options for raising funding?
There are many different ways to raise funds including crowdfunding, grants, loans, angel investors, incubators and accelerators. You can read more in detail about different types of funding available to your business on our blog here.
When should I raise money?
There’s no right answer when it comes to this question, as all businesses have different requirements. However, a common phrase coined here is “raise money when you don’t need it”. For example, if the business is doing well and you’ve proven concept, investors will be more confident in how your business will perform and they’ll be more likely to invest money on your terms, meaning you shouldn’t have to give away as much equity.
On the other hand, if the business is struggling financially, it’s often more difficult to acquire funds – just like a bank wouldn’t offer a credit card to those who were less likely to return the money, the same principle applies here. So, it’s always good to plan financially from the start should this scenario arise.
How much money should I raise?
With more money comes more pressure. It’s important to plan how to allocate the funding and to set key milestones for the business to achieve with it. This includes considering how much time is needed to deliver the key milestones and what resources (people, services, equipment) are needed.
There are different opinions on whether to raise a lot or a little – but how much you require lies within your goals for the business and what you need to prove concept.
There are a couple of benefits with raising smaller amounts. Firstly, less money typically means less equity in exchange. The first funding round typically tends to be the “most expensive”, as the risk is often the highest. Less money also tends to enforce discipline and focus, and means less room to make mistakes.
On the other hand, there seems to be a general consensus that “the more money, the better”. One of the main reasons to take more money is the fact that you can allocate more time to working on your company and product, instead of having to make difficult decisions because you’ve raised too little or ran out of money. Raising funds is a time consuming process.
How much equity should I give away?
Unfortunately, equity investment isn’t as easy as The Apprentice and Dragons’ Den makes it look. However, based on what early equity investors are looking for in return, 10-20% is a good basis on what to give away in a seed/angel round.
Let’s take a look at Mark Zuckerburg and what he did with Facebook, for example. To date, Zuckerberg’s net worth is now $76.4 billion dollars and he managed to retain 26% equity in Facebook, despite many rounds of financing.
Facebook started with money from friends and family in February 2004. The first outsider money into the company came from Peter Thiel who invested $500k for 10% of Facebook, which at the time the valuation for this round was $5m.
Before this time, the company had already started gaining traction and generating ad revenues. Further series A, B & C rounds followed which had a combined total of over £280m. In 2006, when Facebook was only two years old and had roughly eight or nine million users, Yahoo! wanted to buy the social media platform for $1billion. Peter Thiel mentioned at this point it was making $30m in revenue, but it was not profitable. So, out of the three-person Facebook board at the time, Zuckerberg was the only one who didn’t want to sell. This was a huge decision in the history of Facebook, and because of the ownership Zuckerberg maintained, he was able to have the negotiating leverage. In conclusion, when raising money it’s important to retain significant ownership and not get carried away in funding rounds.
What to look for when finding investors
When looking for investors, it’s important to remember that you’re looking for individuals who can add value to your business, not just money. Specific industry expertise and networks can be really beneficial.
When in conversation with potential investors, it’s extremely important to understand how the investor will involve themselves in the company as early investors can play a significant role in shaping a company. Potential investors should ask compelling and educated questions about your business.
“It’s not what you know, it’s who you know”
For start-ups, it’s essential to be engaged with people who have been in a position of operating a business or starting one themselves. If you get the opportunity to connect with experts within the same field, it’s worth asking for their advice and thoughts on your idea as these can often be the individuals who end up investing in your company. In addition, they’ve usually been through the same potholes that you’re about to face and typically have a pool of useful contacts.
Have you thought of all the costs?
Many overlook what additional costs come with raising funds, and one of these is insurance. There are two common insurances taken out at this point, the first one being Directors & Officers liability insurance.
When a business raises funding it becomes exposed to claims at a senior management level. For example, in your pitch deck or investment prospectus you would make particular claims such as “With your money we will do xxxxx and expect to see returns of xxxx”. In the event you fail to meet these, or decide to take the company in a completely different direction, the investor could claim against you and other directors personally. It can also cover things like failing to implement GDPR, or something like an ex-employee taking the business to court for unfair dismissal.
The second insurance is Key Persons insurance, which is essentially a life insurance policy for key staff members who make invaluable contributions to the growth, smooth running, and profitability of the business.
Raising funds is a lot to think about, there is also an incredible amount of admin involved. It’s easy to get it wrong, but the rewards are significant if done correctly.
Whatever you decide, I hope this has helped.
Best of luck!