Ask the expert: your questions on growing the business answered
In this fortnightly column, Ask The Expert, we aim to provide readers with practical advice on how to grow their businesses.
Greg Watts is our resident expert. He is the founder of Demand Creation Partners, a London-based growth consultancy that helps fintechs and paytechs to scale. A visiting lecturer at the American University in Paris and regular industry speaker, he was previously head of market acceleration at Visa Europe.
QUESTION: What’s the best way to secure investment?
According to a 2018 study by US Bank, approximately 80% of businesses fail because they’re unable to secure sufficient capital. Why is this?
There are a number of reasons, but the most common is that they simply don’t know how.
In this column, we’ll look at why some companies struggle with identifying and securing investment and provide suggestions on how to create a plan to get the funding you require.
- Understand who’s who.
When you’re starting out – or even as an established fintech – the world of investment can feel like a Pandora’s Box.
Who should you approach first? What’s the difference between a high-net-worth individual, a venture capital firm or other sources of funding?
Here are some of the most common sources of investment:
- Friends and family – many fintech founders begin investment with friends and family. This is often the quickest and easiest way to get going. However, expectations must be managed on all sides from the outset to minimise any impact if the business doesn’t work. You have to weigh up “Is it worth it?” if things don’t go to plan.
- High-net-worth individuals (HNWI) – as the term suggests, these are wealthy individuals who invest in specific types of businesses. Typically, such individuals hold assets of over £1 million.
- Venture capitalists (VCs) – individual investors or firms that provide funding in return for an equity stake. VCs typically don’t invest in early stage businesses and often only take part in an investment round once a business has achieved clear commercial criteria. Depending on the size of the deal, many will often ask for a seat on the board in return for an equity stake.
- Accelerators and incubators – in recent years, we’ve seen more accelerators and incubators emerge. These can be standalone organisations or attached to an existing business such as a bank or retailer.
- Crowdfunding is a way of raising finance by asking a large number of people for a small amount of money each. Traditionally, financing a business, project or venture involved asking a few people for large sums of money in return for equity. Crowdfunding turns this idea around, using the internet to talk to thousands – if not millions – of potential funders. There are over 40 equity crowdfunding platforms in the UK. Examples include Crowdcube, Crowdfunder, Funding Circle, Kickstarter and Seedrs.
Incubators offer seed funding, help in developing business models, development expertise – and often, a place to work. Accelerators look for companies further along in the process. Their services focus on connecting start-ups with investors and influencers. The payback is usually an equity stake in the companies they nurture. Depending on investment opportunity, this may range from 0.5% to 50%. In some cases, you won’t need to part with equity, just second-round funding.
- National and local government funds, schemes and grants – another source of funding is central and local government. The British Business Bank is a great resource in this area. A government-run organisation, it has a created a tool called The Finance Hub, which helps businesses connect with potential sources of funding. For UK domiciled companies, the most effective government schemes for early stage funding are the Seed Enterprise Investment Scheme and Enterprise Investment Scheme, effectively offering tax relief to investors who purchase shares in businesses. Although not investor related, another scheme that start-ups and scale ups should be aware of is Research and Development Grants offered by the UK Government.
- Identify the criteria for investment.
What do you need the investment for? How much do you require? How are you going to present this requirement to investors?
Is it to launch a use case in a particular market to prove technology or a commercial model to investors? To develop a product or launch to a new territory? Or to strengthen your sales pipeline?
It may sound obvious, but it’s important to be clear what you want funding for before you approach any investors. It’s the first question they’ll ask, so you need to be prepared with a an answer.
James Campbell, growth advisor from London-based investment firm Notwics, agrees: “Numerous fintechs approach us to help them with investment, and it’s amazing to see how many haven’t devised a proper plan before approaching investors. It’s important for them to understand the profile of what their potential investor(s) might look like and also to be able to present and convey their offering to these individuals or groups professionally and in the correct manner. For early stage companies and smaller teams, there’s an opportunity cost of raising capital, which is time taken away from the day-to-day running of your business, so you want to make the time allocated towards your funding round as efficient as possible.”
Once you’ve determined how you’ll use their funding, it’s a good idea to create a one page summary that can be shared with them. It should include:
- A summary of your business
- How much investment you’d like to raise
- What you’ll use it for
- What returns and benefits the investors will see
- Create a plan to connect with target sources.
Now that you’re clear on how much you want to raise and how you’ll use the money, the next step is to create a plan to get in front of the right investors to pitch.
In a recent column, I outlined ways to get in front of target clients to generate more leads. The process is similar for identifying investors and funding sources. Different investors have different criteria so it’s critical you research your targets thoroughly.
For example, some investors only invest in post-revenue businesses or those at more mature stages of growth, whereas others target seed rounds and smaller investments to maximise SEIS tax benefits.
Once you’ve identified profiles of ideal investors, the next step is to create a target list and develop an outreach campaign to get in front of them. Tools to use include email, LinkedIn, networking events, platforms and introductions from mutual connections. The latter is by far the most effective.
Momentum is one of the key elements to every capital raise, so it’s important to start building your target list and approaching investors even before you’ve opened your funding round. Often, investors will want to meet with you to find out more about your company and those involved, so making them aware of your business before actually starting to raise capital can be critical in creating momentum for your round.
Bringing it all together.
Raising investment isn’t easy, but the process can be simplified if you have a clear plan before you make your approaches.
As with lead generation, it all comes down to having a clear message that resonates with your target audience.