Do you need investment? If so, what type?

Investment is a subject that comes up a lot when I am talking to people in the early stages of setting up their business. And on the assumption that you are looking to build a tech solution for your business to sell, you aren’t a skilled enough coder with bucket loads of spare time to be able to build it yourself, and you don’t have large amounts of money sitting in the bank that you are willing to use to fund it. Then it is a subject you need to know a little about.

But investment comes in a variety of different flavours, and not all of them are going to be palatable to you. (Interesting choice of metaphor there – Ed)

The first thing that I need to say is that whatever type of investment you are looking for, accepting it will involve you giving up some of your independence, and mean that to one degree or another, you are going to be accountable to someone else.

Short of a lottery win or a benevolent elderly aunt who happens to be sitting on a fortune and just wants to make people happy, accepting money means both increased expectations and reduction of control.

What you are expected to deliver can vary hugely though, so let's take a look at the broad categories of investment and what they might mean for you.

Angel Investment

An angel investor, commonly known simply as an “angel” tends to be a high net worth individual - In essence someone who has quite a lot of money.

They tend to invest relatively small amounts of their own money into businesses during the early stages of those businesses. They do it because it interests them, because they want to give back, or because they want to make more money without doing the hard work of starting a business.

They usually either want direct equity in return for their investment, which in essence means giving up a share of your company at the beginning.  Sometimes however they may wish to exchange their money for “convertible debt”. Which is a fancy way of saying that they’ll switch the money you owe them to shares later when the shares are worth more.

There is a broad spectrum of angels. Some make very few investments, some make a handful and a few will make 10, 20, or more. A typical angel makes a first investment of between £5,000-£25,000 although a few will go higher and many will follow on for larger amounts in future rounds.

Because they tend to be investing in early-stage companies angels are often investing as much in the founding team as the business per se. Angels are very high risk investors and many will be inclined to try and get their money back as quickly as possible to re-invest.

The downside to angel investment is that the more money you need to raise the more angels you need to persuade to join your round. Wrangling angels can be hard work and take a long time which is a distraction from working on the business..

Venture Capital

Where angels invest their own money, the partners (often known as VCs) of a venture capital fund are investing money that has been raised from a group of other, passive, investors such as ultra-high net worth individuals, hedge funds, pension funds, and family offices.  They tend to invest later in the life of a business than angels, often at the point where product/market fit has been established and a large cash injection is required to grow the business fast.

Because VCs are investing other people's money, their relationship with any given investment and founding team is different to that of an angel. A VC may want to be on the board and is much more likely to interfere in the decision-making of the company. 

If you put your money in a bank right now you’d be lucky to get a 3-4% return. The same money put into an S&P 500 ETF fund is likely to yield, over time, about a 10% return on your money. To persuade their backers to give them the funds a VC has to promise to do better than that. To that end VC funds claim that they will return 2-3x the fund value in 10 years. The good ones can do this but, typically, that is about 5% of all funds. More than half will struggle not to make a loss.

A large proportion (in some studies over 90%) of startups are going to fail. Which gives VC’s a problem: if 9 out of 10 of the businesses they invest in are going to fail, they need that one success to return 2-3x their fund. If you’ve raised a £500m fund then you need to exit that company for something like £1.5bn. But you don’t know which of your companies is going to be that one so you have to look at all companies through the lens of “Could you be the company that will be big?”

Simply being a good, profitable (even wildly so) business is not enough.

This is a massive subject and one we will look at in more detail, but what it means for you, is that you can find your investors disagreeing very strongly with you if they think you are looking to make decisions that may stop them getting the returns they need.

The downside to VC funding is that it is extremely difficult to get for brand new organisations. Not impossible, but it’s far from a sure-fire option.

Crowdfunding

If finding investors doesn’t sound appetising then a crowd fundraise can be a viable option either to fully-fund your business or to fill out a larger raise.

The key advantage is that the platform brings the investors to you. However, it’s not all good news as these platforms are increasingly busy meaning that your opportunity may find it hard to cut through the noise. Further, the quality of investors on a crowdfunding platform is very variable and you can end up with a lot of small investors that will cause headaches down the line.

It bears mentioning that there are two very different forms of crowdfunding.  There is true business investment of the type offered by Seedrs and Crowdcube where you give away small amounts of equity for equally small investments, and there is the type of funding facilitated by sites like Gofundme, and Kickstarter where you can offer any reward you want in exchange for money (within reason). The commonest thing is to sell your “product” in advance, and use the money to help build the company.  In reality, these are customers and not investors, so while you will have a relationship with them, they don’t own any of your company, and your relationship with them is quite different..

In Summary, there are a lot of different approaches to sourcing investment for your business. These will differ depending on exactly what type of business you are running, what stage your business is at, and where in the world your business is based.

I’ve worked with a lot of people as they searched for, and secured, investment. If that kind of experience might be relevant then please come tell me about your opportunity and we can see what might help you.