How to fund your startup: the difference between seed, angel and VC investors.
You've built a prototype. Found your first users. Now, you're ready to grow.
If you're thinking about going for investment - perhaps for the first time it can feel like a big decision - and that's because it is.
It’s a great way to unlock growth - but every route has upsides and downsides that affect how you structure your business and how it grows.
This little guide outlines the basic types of investment that you can seek.
Wait, do you really need investment?
Before you build that pitch deck and investment case, you should ask yourself ‘do I really need investment to grow?’
Sure, it’s a tried and tested way to grow businesses quickly. It could make you rich. But it comes with downsides too. Investors expect returns. You’ll go back from being your own boss to being responsible for delivering on goals set out in a plan. You’ll no longer have the power to make decision on your own about the direction of your company. And frankly, it will be more stressful. It’s possible to grow a business organically and still become an enormous success. Mailchimp bootstrapped. So did Github (until a $100m round). And 37 Signals - the company behind BaseCamp.
Whenever we work with a new business, we make sure that founders dig deep, soul search and ask themselves whether they could grow on their own. Get yourself a copy of ReWork - by Jason Friedman (the Founder of 37 Signals) for more on why it could be the best thing you ever do.
Either way, working through what you really want from your business will help you to assess the purpose and level of investment you need to grow.
Venture capitalists are ‘lifecycle investors’: they tend to work with companies from fairly early stages, through rounds of funding until a company is exits through acquisition or IPO.
You’ve likely heard of the big, Silicon Valley stalwarts like Sequoia, Benchmark and Greylock. But over the last 5 years, there's been an explosion in the number of smaller VC firms across the world as investors look for alternative opportunities. Often, they specialise: the Foundry Group, for example focuses on early stage technology companies and London based MustardSeed works with purpose-driven businesses. Typically, VC investment follows an Angel round and a Seed investment.
Seed VC Investment
Seed investment takes many forms. Incubators and accelerators, crowd funded equity and a wave of ‘micro-VCs’ are some of the many examples of seed funding.
Seed funding is likely your first - or second (after a friends and family) round of funding. Expectations from investors will range from a pre-revenue concept through to your first few thousand in revenue or customers - either way, showing traction is key to impressing investors.
A seed investment will typically range from £100,000 - £1m. It’s likely to fall somewhere in the middle in the US, and towards the lower end in the UK and London. In the UK, the Government’s Seed Enterprise Investment Scheme (SEIS) means that there’s a great incentive for investors up to the first £150,000 - so we often see seed rounds around this figure.
As you investigate ways to fund your growth through a seed round, consider what you need, outside of the cash: do you need a mentor? An office space for your team? Access to a network or corporate partners? Though many investors promise these sorts of things, the level of support you get from each category of seed investment is very different. There seed-VC investors fall into two broad categories:
- Micro-VC’s: These are firms that have not publicly raised a fund over £100m, and focus on pre-seed and seed rounds of less than £3m - often much less. Expect only a little support as you grow. Here’s a list of the current active firms.
- Incubators and accelerators: These organisations focus on creating startups, advising and helping them grow. A good deal of them are either run-or backed by VCs. Some take equity, some don’t. Some fund, some don’t. Most will support you with specialist help and resources to grow. Here’s an epic list of the UK’s top accelerator programmes to get you started.
THE SECRET TO SECURING INVESTMENT AND A GREAT VALUATION.
If you're working on a round of investment, it's often difficult to know what to focus on.
Here's the secret. There's little more important to an investor than a great business model, and a strong financials behind it. It's the key to raising capital. And getting the valuation that you and your business deserve.
We're offering a free micro-course to get you started. Developed in conjunction with the Design Council - we'll outline our approach to building a great investment case, and exercises to building your own.
What are you waiting for?
Angels are simply individuals who invest their personal wealth in companies. Their involvement in your company can vary drastically - based on the way you interact with them, the structure of the deal you make and their personal interest in your project. Angel investors come in many shapes and sizes.
Keep in mind two key categories:
- Individuals: family, friends or people found through your network. They’re likely to be attracted by SEIS opportunities (see above for more on that) - and their investment stake will vary hugely. Completing a whole round of funding through individual angels can be tough (unless you find highly engaged individuals). Often, it will involve many stakeholders (and many coffees, pitches and negotiations), and small stakes. Consider finding a ‘lead investor’ instead: it's a great way to open doors to investment networks - where the terms of your agreement will be often be set by this first negotiation.
- Angel investment networks bring together Angels and investment opportunities. Likely investment of £150,000 - £1m. Bringing a lead investor with you - and pitching to these groups is a great way to quickly gain seed investment through a syndicate. Be aware that all will expect a great pitch, and most will want evidence that you’re making traction. Offline groups include local organisations like Kent Investor Network; online there’s Syndicate Room, Newable and more modern networks like Seedrs and CrowdCube.
A few last thoughts
This is just a quick (and basic) overview of the basics from a London - and UK - perspective. Finding the right way to fund your startup is a huge decision - and will fundamentally change how you run your business.
Explore the options. Read. Get a feel for each avenue by meeting groups where you can before you pitch them. If you get stuck - or want more in depth, personal advice how to approach your funding round, give us a call, or send me a mail we’re very happy to chat.
Jared is a partner at Think Plan Thrive, a London based Strategy company. We help organisations seize opportunity. Execute and grow, fast. We’re specialists in commercial and marketing strategy, pitch and investment cases.
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