Fundraising For Early Stage Businesses

A number of months ago, I was asked to provide (from my perspective and experience) an overview of the fundraising life cycle and stages for young and growth businesses to members of the Entrepreneurial Exchange.  

There are seven main stages that I’ve observed within the life cycle / process!  These are highlighted below along with some of the key points of note and/or factors to be considered:

STAGE 1 - Establish the NEED

• What stage the business is at will determine the nature of the funding required and which category and specific funder you need to target
• No substitute for research & more research
• Who should you approach & Why?
• It’s best to approach local and specific funders
• Timing is key!  Are the funds open? Do they have funds?
• Also consider whether you need Support & who might be best suited to provide it

STAGE 2 - Are you INVESTOR READY?

You need to ask yourself are the following credible about your proposition:

• Vision / Idea
• The Business Plan
• Is it Researched?
• Differentiated?
• Tested?
• Is the product Wanted / Needed?
• Right Timing?
• The founder / The Team
• Passion
• Experience
• Are the founders & executive personally financially committed & locked in?
• Realistic Financials?
• Prospective Return - High Growth not Lifestyle business
• Realistic expectations from Execs in terms of salary & No special terms for them!
• Realistic Valuation
• Is the proposition Capital Efficient?
• Are the Exit Routes identified
• Is there a simple share / legal structures etc

STAGE 3 - NETWORKING & COURTSHIP of prospective funders

• Who & How
• Do you need help & warm intros - Yes!
• Takes time! 3 to 6 months plus
• Beware Investors Talk to each other
• Preliminary Sales Pitch / Testing the water!

STAGE 4 - THE PITCH

• Adopt the 7P’s - see separate blog “Making The Perfect Pitch” 

STAGE 5 - FOLLOW UP / CLOSE

• Must follow -up! They’re busy and getting approaches from many others!  Don’t wait for them to get back to you as they may never!
• They also may initially say No!  Consider how you can save it by adopting another approach / angle!

STAGE 6 - DILIGENCE

• Akin to the worst and most invasive of medical examinations!  Unavoidable and necessary!  It’s an essential part of the investors / funders process

STAGE 7 - TERMS / COSTS

• You will likely be provided an initial Term Sheet or Letter of Offer.  Once you’ve agreed this and the outline terms, then a formal Investment Agreement will be produced.
• Unlike VC’s, Business Angels are now moving to a more standard approach.  LINC, the Scottish Business Angel Association are leading this.
• Be aware there are many standard terms (Indemnities, Warranties, Disclosure, Covenants etc) that are not unreasonable for someone taking a risk on you / your business, that you will have to accept if you want the investment.  However, make sure you get appropriate legal, financial and commercial advice.
• There will be costs involved!  Arrangement & Monitoring Fees potentially plus you will be asked to pay for or at least contribute to their Legal, Financial, Tax, Diligence costs for doing the deal with you!  Can be up to 5 to 10% of sums raised!

You’ll need lot’s of STAMINA and PATIENCE too:

• It’s not easy! It’s a hard and long process with potentially many lows! 
• You need to have determination, perseverance & stamina
• Don’t give up!

 A couple of other (not insignificant) ISSUES you’ll need to think about:

• Who’s running the business and progressing the plan whilst you’re out trying to get funding?
• You’re going to improve your changes of securing funding if you seek the right help at the right time!

Murray Strachan

Murray works with executives, funders and shareholders to recover & create value!  You can contact Murray via his website www.murraystrachan.co.uk or follow him on twitter @murraystrachan