The money worries keeping start-up CEOs awake at night
If you find yourself worrying about having enough funding to keep your business afloat, then you’re among the majority of UK start-up and small business owners.
Research conducted with Startups.co.uk found that a staggering 68% of small business owners are kept awake at night with concerns over funding and cashflow.
What’s more, 43% admitted that they had found it hard, or in some cases very hard, to source investment for their business. Given the range of alternative finance options now available to businesses in the UK and schemes like SEIS and EIS, this statistic is surprising.
Yet, the fact that start-up founders are finding it hard to source investment could largely be due to a lack of awareness or understanding of funding options. For example, 63% of small business owners said they feel ‘new’ sources of finance aren’t accessible to them.
From the research, it’s clear that funding is a core area where founders need help and advice. Ahead of the Plusnet Pioneers programme, we brought together a group of successful start-up entrepreneurs for a roundtable discussion to share the funding challenges and money worries they’ve faced, along with funding advice and insights.
You can read the full discussion – covering everything from VC and angel investment to crowdfunding - below:
Venture capital funding:
What source of finance have you found to be the least accessible and hardest to raise?
Tushar Agarwal, Hubble:
“We’ve been in the position [of worrying that our funding runway was going to run out]. We were going through this amazing story of having VC financing and it not actually being that difficult - it felt way too good to be true. It ended up being way too good to be true.
“You’re depending on that money coming through. When you know you can’t do payroll at the end of the month, it’s probably one of the worst feelings that you can ever have in your life as you know you’ve got so many people depending on you.”
Emily Forbes, Seenit:
“We always talk to VCs and every time we end up raising from angels. I think what’s bad in the industry is people see that as a failure - that you can’t raise from VCs therefore you can’t get backing. That’s not true.
“We’ve had VC offers and had terms we didn’t like. We had strategic conversations where we noticed that what they were trying to do was creep up to 51%. If we had let them in at this point, we’d get stung in the next round and the one after. We realised that as we were revenue generating, we could raise angel money and [raise it] a hell of a lot quicker.
“I think VCs have so much of a stereotype, I don’t think people look at seed rounds in the same respect.”
Can you expand on your experience of dealing with VCs?
Nelson Sivalingam, Hownow/Wonderush:
“Raising venture money changes how you run your business. It’s not a natural step, you know you’ve got to really weigh it up. It changes how you manage your team, how you manage your trajectory.
“There’s also an over emphasis on valuation as a topic. When the valuation conversation comes too early with your start-up, it could go wrong. You want [the VC] to buy in and connect and not talk about price.
“What works for us now is that we put that conversation to the side. If the [VC] asks us what the valuation is then we will say ‘We’re talking to a few people and still deciding but, if all else is okay, are you in?’ And once someone buys in, you can then go to someone else and say ‘so-and-so has bought in, we’re agreeing price, are you interested?’ It gives you a bit more leverage. Whereas starting the conversation with the valuation topic steers you away from what you want to talk about.”
“It’s really difficult because VCs – or in fact any investors – ask ‘How much are you raising and what’s your valuation?’ before they even ask what company you’re from.”
“Our valuation doubled, halved and then quadrupled again in the space of four weeks or something like that. As a former investment banker who used to do company valuations for a living, I found it totally ridiculous.
“The interesting thing about venture capital is that you assume they’re there to take big risky bets, but I’ve often found some VCs are quite risk averse.”
What have you learnt from the fundraising process?
“We’ve raised angel money both times. Each round that we’ve done, you need to talk to so many angels. Conversations about raising [finance] aren’t when you’re raising, they are 24/7 - it is the whole time.
“If you do get angels involved, what I’ve learnt from the second round is to get these angels to introduce you to other people. If a friend of theirs has invested, the likelihood is they’re like ‘Oh, if they’re in, I’m in’. If you do contact angels cold, it’s quite exhausting.
“Also in terms of the amount you’re going to raise, if you need to raise £500,000, go out to the market - this is what I’ve done anyway just for me – with £300,000 or £400,000 and then you’re oversubscribed. You want to be oversubscribed, you want the momentum and the story.”
Daniel van Binsbergen, Lexoo:
“Our last raise was £850,000 from institutional and angel investors. I was raising it over the summer because, before then, my numbers weren’t where they needed to be to raise it. Yet I also knew I was going to run out of money by the end of the summer.
“There was one moment where we had £2,000 left in the company account so I stopped all marketing spend, everything. We got through it but it was still the most stressful week of my life and I didn’t know how we were going to get over it.
“One thing I would recommend is listening to rap music on your way to the [investor] meeting. It really pumps you up!”
When you started, what source of finance did you consider first?
Gem Misa, Cauli Rice:
“It took us three years to develop the technology [for Cauli Rice] and because it was a completely new and unique manufacturing process that we developed, there was no manufacturer that was willing to manufacture for us or one that had an existing cauliflower rice line.
“We had to build the line so that’s when we started looking for funding. At the time we started approaching banks for loans, but because we didn’t have any big assets to guarantee against loans we kept getting turned down. I was already following crowdfunding platform Kickstarter in the States at this time and thinking and going ‘Oh gosh I wish there was someone here doing that’.
“The irony is that the only time you get bank loans is when you don’t need the money [and you’re more established], it’s like they think ‘Oh you’ve done well, now here’s some money’.”
What is your view on funding alternatives? Do they raise any complexities?
“We went through crowdfunding three times. I remember we won at the Startups Awards at the same time Crowdcube did when they were just starting, and that’s how we found out that crowdfunding in the UK had started.
“The benefits of [crowdfunding] are you get brand ambassadors and that’s a big plus because they help spread the word about your product – so it’s not just funding you get, but a really strong grass roots channel to market your product through as well.
“For us, it helped that we were the first cauli rice brand in the world and we have a global patent. We’re actually looking at doing a fourth round now for our US launch.”
Andy Logan, Vape Emporium:
“We’ve been raising through Seedrs and they’ve been fantastic actually. There were lots of tips and tricks that I didn’t realise about crowdfunding:
• You’ve got to have a slick video so we’ve had to get professional people in to do this video.
• Another key point is you want to tee up a minimum of 30% of the funding you want to receive from [crowdfunding] So you contact say friends, family, suppliers etc. so as soon as [the round] goes live they start funnelling it in and then it starts picking up.
• The other thing is forecasting. It kind of opens your mind; even detailed things like; we’re going to have to get someone in to kit out and decorate our new stores, office and warehouse – as we’re planning new facilities, once we get the raise. You’re having to think three years in the future about tiny details. It’s hard.”
“I reckon there are so many learnings from crowdfunding that can be applied to raising funding from VCs and investors - like having an epic video for your pitch.”
What are the challenges if you don’t source external investment for your business?
Luke Barlow, Netduma:
“[We’re bootstrapped] and I think we’re very fortunate. We’re a lean company so not having cash has made us quite savvy.
“Whereas before, it was the issue of how we market on no budget that kept me awake, now it’s what to do next as we’ve got those marketing channels working and we’ve got more cash in.
“I know we’ll need investment one day.”
Mike Bandar, Turn Partners:
“I’ve always been keen not to speculatively raise and bootstrap as far as we can.
“About a year ago, the company was doing well and we went on a staff trip to Mexico. We'd been spending aggressively for growth and investing into a new business knowing we had a grant arriving soon. While we were out there, I got a call from my accountant who said ‘We forgot to tell you but you’ve got to pay your corporate tax and there was a delay on a grant we were expecting’.
“It all came to a head when I was in this café in Mexico and I had this moment where I was like ‘We’ve ran out of money and we’re in Mexico, what am I doing?’
“It was a great lesson for us because it has enabled us to have razor visibility on our finances now. When we got the grant through we became more conservative [with our spending]. At one point, we were holding six figures in our bank because I was scared but now we make our money work for us.
“The big point is not actually where you get your money from but how [money] works for your business and what you do with it.”
What have you learnt from raising finance that you think new business owners should understand?
Pip Murray, Pip & Nut:
“Once you know you’ve got profit, you can raise money from debt financing, invoice financing or other routes. It’s about recognising that, at different stages in your company, you don’t need to rush to raise money.
“I think not enough businesses – especially product businesses - look at their supply chain and realise they can get a credit line with their manufacturer. If you can get 60-day payment terms with no credit line, they’re going to bankroll you for quite a long time.
“It’s the same with banks; they don’t advertise the other products they do enough. Like some banks can buy the product from your factory and then extend your payment terms.”
“It’s also the mentality with which you approach fundraising. Because starting a business is so hard, you sometimes approach fundraising as way of begging for charitable donations, but that’s not the truth. You’re basically finding someone to give them an opportunity to make more money in the future. The power lies on your side.”
The funding landscape:
How easy it to raise finance as a start-up business in the current climate?
“There are these amazing stories out there where entrepreneurs don’t even look for funding and they just get it.
“The analogy I use for it is that you’ll always have a Beyoncé and a Jagger and those guys will always be incredible but there’s always a long tail of musicians who have successful careers too. I think with entrepreneurs we have the same thing.
“We have the superstars, like Zuckerberg and the Google founders, and they will have those incredible founding stories - some of them are true, some are made up – [as well as a long tail of successful smaller businesses].
“I think [finding investment] as a start-up is always hard because you’re trying to bring something new to the market and getting people to understand why it’ll be valuable.”
Plusnet is on a mission to help small businesses and budding entrepreneurs grow and has teamed up with Startups.co.uk to create Plusnet Pioneers, an exciting programme of content, events and mentoring. Article written by and first published on Startups.co.uk.
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