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Insights and Advice About Funding Startups – From Last Night’s Event

Last night was the first event of Esc’s summer series (more being announced shortly).

80 of us crammed into The Rehearsal Room at Adam Street Club to hear Paul Grant (The Funding Game) and Rob (co-founder of Escape the City) talk about ‘How to fund a start-up‘.

A big thank you to Paul for sharing his advice.

Some great points including:

  1. There is no lack of angel investment out there – what’s lacking is good deals (become a good deal by de-risking your pitch as much as you can).
  2. Pitching is a two-way process, you have to click with the investor as well.
  3. Find non-executive directors or advisors with more experience than you who can add credibility.

For more general funding information and Paul’s upcoming events check out Paul’s site: www.thefundinggame.co.uk.

And you can get a special 25% discount off any of his upcoming events by entering “Escape” when booking on Eventbrite: http://thefundinggame.eventbrite.co.uk

Join The Funding Game Linkedin Group here: http://www.linkedin.com/groups/Funding-Game-4185471/about

How to Fund a Start-up – key points

Beneath this fantastic summary from Bev is a list of the key points from Rob’s notes… if you’ve got any questions that weren’t answered last night please do ask them in the comments.

How to fund yourself personally

When you start a business you have to worry about is your personal bank account before you even begin thinking about the business bank account and any associated investment rounds out of which a salary could come.

  • Stay in your job and start the business from the safety of a monthly salary.
  • Save an Escape fund – can you save enough to survive for a year / 6 months with no income?
  • Cut out as many costs as you can – can you sublet your room / apartment?
  • Do part-time work to bring in some cash – contract consulting, private tutoring.
  • There are no two ways about it – be prepared to be poorer than you were in your job.

How to bootstrap your business

Plan A should be to build a business without external investment. At least if it is the type of business you can get started with minimal cash.

Admittedly some businesses need significant funds to event get a prototype built or their operations up and running… but many of us can get our ideas get going without external funding.

  • Revenue – the best way to fund a business is to get someone to pay you for something.
  • Be Stingy – starting a company today (especially online) is cheap. No office, no employees, no PR firm, no lawyers, no branding, no fluff. Do it yourself for as long as possible.
  • Be Inventive – Escape the City paid for their first website with the money they made from their 600 person  launch party.

How to get cash from Non-Investors

  • Bring new partners into the business – ask them to buy in. You get cash into the business and a new team member.
  • Bank loan for business – we got a Barclays Business loan at at few clicks of a button.
  • Incubators – some will give you cash (often in exchange) for equity. You get advice, support and workspace.
  • Grants – there are lots of grants out there especially for ideas with a positive social impact (UnLtd) or high technology products.
  • (We’re going to write a separate blog post on Incubators and Grants – if anyone has some good recommendations please add them in the comments)
  • Kickstarter style pledges – get funded without giving away equity. Kickstarter is launching in the UK later this year.
  • Friends and family loans or ‘investments’ – often the best terms you’ll ever get. Oral agreements. People who have known you your whole life are more likely to support you and forego paperwork, etc. Make sure that there isn’t scope for misunderstanding further down the line if it is an informal arrangement.

Lessons Learnt from Escape the City’s VC pitching

  • Serious traction / momentum is required to get a VC deal. They don’t fund ideas. Not many people get VC funded.
  • They’re looking for demos, prototypes, teams, boards, users, technology, revenue, clients and competitive advantages.
  • Raising money is a massive distraction from building your business.
  • It is very hard and can be quite demoralising. Be prepared for this and develop thick skin.
  • We felt that taking VC money was a bit like going into debt – and the target for profitability is even further away from you.
  • See Gary Vaynerchuk on VC money / investment – here. And Why Do We All Praise Startups When They Receive Funding?
  • Your vision will evolve as you pitch. This is a good thing. You’ll get clearer on what you’re actually trying to do.
  • Make sure you’re not just telling the investors what they want to hear – tell them what you want to build.
  • Big isn’t better – better is better. So don’t decide you need to build a £500m company unless you really want to.
  • Define success for your company – how big, how much profit, how many employees, what valuation?
  • Be clear on whether your vision for your company is a VC deal or not (in terms of the exits / valuations they need).
  • You’ll get masses of advice (including this post) – some is good, some is bad – you decide which you want to listen to.
  • VC (especially in London) is a small club and not many people get inside it… don’t get too hung up on it.

How to get invested in by Angels / VCs

  • Try not to end up pitching – have meetings / chats / demos / coffees. It’s too easy for a formal pitch to turn into a car crash!
  • Don’t jump through hoops for potential investors – create the documentation you want to show. Politely decline requests for different cuts on your information. You just don’t have the time and the chances are it won’t be worth it.
  • The only way to get better at pitching is to get grilled a few times.
  • Most people won’t ‘get it’. Don’t be demoralised. Just focus on increasingly clear communication.
  • You’re going to have to sell a big vision to get them interested. Make sure it is your vision though.
  • Don’t obsess over the documentation (you will, we all do, but it’s worth saying it!).
  • Nail the elevator pitch – “We do XXX, we help YYY, we are building XXX for people who XXX, etc”
  • Nail the plan – “This is how much we need, this is what we’ll do with it, and this is what we’ll have built at the end of this period.”
  • Meet with entrepreneurs who have been funded by the investors you are meeting – they’ll give you the inside track.
  • Don’t worry about negotiation – if they’re good investors the valuation and % give-away will be fair (although watch out for the Option Pool Shuffle).
  • “What is your valuation?” is essentially a trick question. You’re going to give away between 25% and 35% of your company and they’ll either agree to fund your plan or not. The valuation is a multiple of those two figures.
  • Don’t ever pay to pitch. They’re the ones with the money.
  • It’s a numbers game – just like job interviews. The more you do, the better you’ll get. Additionally, it’s also about meeting enough people till you meet someone who a) you click with and b) whose world view aligns with your vision.
  • Where to find investors? Introductions. Never go cold. It’s a bit of a treasure hunt. Linkedin, Twitter, start with your network. Angel networks and other investment models (Envestors, The Angel Investment NetworkGrow VC and Find Invest Grow - disclaimer – we haven’t got direct experience of these services).
  • Non-traditional routes: Accountants, Lawyers, Wealth Managers, Fund Managers – they all often have clients who might be interested in putting some of their portfolio into a higher risk investments.
  • Get high profile people associated with your pitch – this is hard in the early stages because you might not be in a position to formalise a board. But if you can have an informal board of advisors (no payment or equity to start with) and these people have a good reputation in your field then that certainly helps.
  • Try not to need them. It’s like dating or any cat-and-mouse game. The less you need investment the more attractive you can seem. Bootstrap, have revenue, be sustainable.
  • Every month that goes by that you don’t need investment or don’t get investment is a month that you are de-risking the opportunity for the investor… but you are also making yourself more valuable through this period. So start having the conversations early and see if you can keep going without them – and hitting some of the milestones in your pitch (those that don’t rely on lots of investment of course!).
  • Check out http://bamlondon.blogspot.co.uk/

VC’s aren’t evil but you do have to understand the game that they’re playing. They want you to succeed but in order for the VC route to work you need to share a very clear vision. It will be a 5-7-10 year journey to boom or bust. There’s less room for building a respectable sized business.

VCs make investments into businesses that have potential to hit massive valuations. The laws of probability state that more of these investments won’t hit their targets than will. You have to decide a) whether the size of your vision is a VC deal and b) whether you’re up for a small chance of hitting a big prize.

Crowdfunding – things to be aware of

You can read more about Escape the City’s crowdfunding ‘lessons learnt’ here and here.

  • Firstly, we brought our crowd with us – Escape the City’s own members made up our 394 investors. Without your own crowd this is going to be harder to pull off. Crowdcube does have an active investor base but we don’t have any experience of it.
  • There are two providers in the UK currently: www.crowdcube.com (Escape the City used them) and www.seedrs.com (just launching). The fees for Crowdcube are 5% of the amount raised. Seedrs charges 7.5% plus 7.5% of any capital gains to the investors as a result of an exit.
  • Crowdfunding is in its infancy – expect teething issues. Speak to the website owners regarding any regulatory authorisations, the process of investors depositing money into your pitch, and any potential other reasons for delays.
  • Get the numbers right in your financial model. Find an expert who can help you build something if you’re rubbish with numbers. We used http://www.edgeff.co.uk/ – good affordable service.
  • It’s important to hit the magic 40% mark when crowdfunding. No pitch that makes it to 40% fails to make it to 100%. So early momentum is crucial.
  • Can you create scarcity around your pitch? Request pledges before you launch in order to run a queue and waiting list? Again, tricky if you don’t have a massive crowd to bring with you.
  • Bring non-crowd investors to your pitch if you can. This will help with that early momentum to move your pitch off the scary 0% mark.
  • Make sure you’ve got your Articles and FAQs really clear.
  • EIS and SEIS are massive incentives for individual private investors. Check it out here: http://www.enterpriseinvestmentscheme.co.uk/
  • We sold B shares to our crowd investors – these have exactly the same rights as A shares but they don’t come with a vote at any AGMs. Which means we are free to make important business decisions without needing 394 answers each time!
  • Crowdcube doesn’t currently allow for pre/post-money valuations. You have a single valuation on your pitch and it is the post-money one. This means that if you want to extend your round after hitting 100% the additional equity will cost you a bit more than if you were to use the pre and post-money valuation mechanism.
  • Other routes to crowdfunding outside of these sites: 1) Require investors to self-certify like Trampoline did or 2) get your pitch approved by an FSA authorised accountancy firm like Brewdog did.

It’s important to remember that these are just Escape the City’s experiences and understanding of funding. However, we’d encourage you to try and build your business yourself. Try to only seek external funding when you have pushed your business as far as you can yourself.

If you have an actual business (with a brand, revenue and customers) you’ll be much more likely to succeed in your funding efforts. Bootstrapping isn’t easy. It can be fun but you need to be prepared to be poor for a while!

These are good: Enjoy the process, Don’t take funding – focus on profit, and How I survived my first year without VC money.

If you’ve got any more questions from last night, feedback or any other questions about funding please just let us know via the comments.

How did you find last night? What future events should we run? We’d love to hear what you think via this short form – http://bit.ly/Metjox

You can see photos from the evening here: http://on.fb.me/PLbsNK.

Finally, thank you so much for coming and keep an eye out for more Esc events over summer: http://escapeco.eventbrite.com/