Most businesses start with funds from the founder, perhaps also their family and friends. Sometimes this is all that’s needed and a few companies manage to bootstrap their way to market, but this is rare. Most ambitious companies – particularly those with products involving R&D - will need to raise funds from external investors (e.g. seed funding) in order to develop products and achieve their business growth plans.
A company’s first attempt to raise funds can often be a tough and painful rite of passage so read on to understand seed funding basics to save you time and make the best first approach to investors.
What are the two key sources of seed investment?
- Angel networks.
What do these seed funding options look like? Angel networks are typically geographically focused (investors like to keep a reasonably close eye on their cash) and within these, individual investors who will typically specialize in sectors they understand – digital, med-tech, fin-tech etc. There are also a number of companies (mostly London based), which run private investor networks, plus family offices (managing family wealth), finance boutiques and a small number of venture capital companies who deal with seed-stage funding. All these organisations will take a percentage of funds raised.
Crowdfunding has grown rapidly in recent years and comes in a wide variety of flavours covering both equity and debt financing. For equity funding, Kickstarter is popular with creative companies raising relatively small amounts. Further up the chain, organisations like Seedrs and Crowdcube have built strong portfolios consolidating mostly very small investments into projects raising millions. Syndicate Room occupies another niche, raising larger sums from more sophisticated investors, but requiring companies to have raised a significant proportion of its required investment from other sources. And debt funding is dealt with by companies such as Funding Circle. Crowdfunding organisations will also take a fee from funds raised.
What do investors want to see?
The communication documents required for fundraising are changing. In the past, the business plan was the key document, with investors typically asking for just the executive summary before going further. Business plans (also known as information memorandums or IMs) still have their place but the first source of information is now more often than not a PowerPoint slide deck. I met an angel investor recently who told me he never reads business plans anymore, looking to get all the information he needs from slide decks. While this may be unusual, it highlights how information is moving from paper to screen.
Presentation slides to an investor will include all the key points you’d find in a business plan:
- an outline of the problem to be solved and the company’s proposed solution
- details of the technology involved
- the team
- target markets and routes to those markets
- IP status
- competing products
- brief financial summary
- the amount to be raised and how it’s expected to be used.
The slide decks now include more graphical information and sometimes videos.
Make it personal with VCs
Face to face contact with potential investors is vital, certainly for high-net-worth individuals but just as much for institutional investors. At a pitching event I attended recently, one of the Venture Capitalists (VC) speakers stated that ‘cold mailings to VCs never, ever work’. Networking is essential and pitching events organised by angel networks provide an excellent opportunity to get your ideas across. To protect their reputations, most networks will have processes in place to make sure they’re only dealing with good quality, credible propositions.
Seed funding in the real world
I recently worked with a company seeking to raise £300k of seed funding to develop a medical device for use in cancer treatment.
We took two routes to funding. Firstly, working with angel networks including Henley Business Angels, the Surrey 100 Club and the Surrey Investors Club. We made a number of pitches, refining our presentation in the light of feedback received, resulting in a focused group of interested investors. At the same time, we worked with a London-based finance boutique introduced to us by one of the company’s non-exec directors (taking on non-execs with contacts like this can be invaluable).
They were successful in lining up a number of investors specialising in med-tech, who eventually provided a large part of the funds raised. It’s usual (and very helpful), for one of the larger investors to take a lead role in handling any due diligence and administrative issues on behalf of the smaller investors. In this case, the finance boutique took on this task. The full funding round took about six months to complete and eight months later, having hit the milestones set out in the original round (very important!), the company has launched another round for a further £500k, at twice the original valuation.
Raising funds can be a complex and time consuming process. Benefit from your own Financial Director, aka a FinanceHead, for help in navigating the issues involved, create your slides decks and represent you to potential investors. Contact Michael who can suggest the most appropriate FinanceHead for your business.