By Alex Bridgen
If you’re a founder with a dream and you are trying to figure out how to make your vision real by raising early-stage funding, it’s safe to say the current ecosystem is extremely difficult to navigate, and unfortunately there doesn’t seem to be many people with a map. Or at least not one they are willing to share.
The later stages of the startup journey, from late Seed and beyond, is reasonably well documented, whilst those crucial first few years are where so many budding ideas get lost in the maze and very few extend a helping hand. Think of us as a master navigator, sitting on your shoulder every step of the way, continually guiding you, de-risking your venture and identifying the very best funding opportunities, including grants, accelerators and the all-important Seed and Pre-Seed funding rounds.
This article focuses on the latter, so let’s start with the basics. What do you need to do to bring that first investor money in, and what do you need to know before you start fundraising?
Step 1: Make sure you understand the terminology and process so you can make the right decisions for your business.
To help you understand this guide to raising seed funding in the UK, let me quickly run through the basics.
What is Seed/Pre-Seed capital?
Any startup needs money to purchase equipment, pay their staff and in the case of most SaaS start-ups, build their MVP and get it to market. Most importantly, to give a startup a fighting chance of survival, they need cash to facilitate growth in the long-term. In almost all cases, outside capital is required to make these things possible.
This initial capital raise that a startup goes through is typically referred to as ‘Seed’ or ‘Pre-seed’ capital, with Pre-Seed naturally coming earlier, and at a lower amount. Pre-Seed funding may also be referred to as a ‘friends and family’ round, as these are often your first investors on the term sheet. Several of our portfolio companies here at Fountech Ventures are going through the process of raising these early funds, or are due to commence in the coming weeks, including Soffos, AutoM8 and SPRYT.
Why do startups raise capital?
Without external funding, most startups will be unable to ever get off the ground and certainly have little-to-no chance of flying. Aside from a few exceptional cases, the amount of capital required to take a startup from an idea in the founder’s brain to a profitable company is well beyond the funding capabilities of founders and their inner circle.
We assume that a startup is intending to grow at pace. High-growth companies tend to burn through capital to sustain their growth-rate before they reach profitability. Whilst bootstrapping can often work in the early stages, there comes a point that a startup needs more capital to reach profitability and ensure long term survival.
Early investor funding can eliminate some pre-profit uncertainty by boosting reserves and providing a ‘war chest’ of sorts with enough cash to retain key staff and keep the lights on. Thankfully, there are countless investors out there, both small and large, looking to invest money in the right startups. Be it through venture capitalists, angel investors, private investors or crowdfunding, there is no shortage of ways a startup can raise some much-needed Seed/Pre-Seed capital.
All of the above have their own advantages and disadvantages, which is why we at Fountech Ventures operate on a case-by-case basis, keeping the term sheet concise, and full of carefully selected names who represent the best fit for any particular venture.
When to raise capital?
There isn’t a specific answer as to exactly when you should speak to investors about raising seed capital. One startup may need to raise funding before they can even begin product development. Another can build out a fairly substantial product using a founder’s own capital or skillset and bring investors in later to cover marketing / sales expenses. Some may not even need to think about raising capital until much further down the line.
Different investors have a different risk appetite, but to get the ‘average’ investor to part with their cash there is somewhat of a magic formula. Not to say this works in every case — every investment pitch will be different with each investor asking questions depending on their understanding of your industry and their own investment experience / preferences. But before you even consider speaking to investors, you need to make sure that all the below ingredients for this formula are in place.
Step 2: Put yourself in the investors’ shoes to best determine what they’ll need from you.
What are the main things investors want to see?
1 A viable idea and an investable team. At the most basic level, the idea must be compelling and the team convincing in their ability to make it happen. An investor won’t necessarily ask for a hard copy of your CV, but they will want to know what your team have in their ‘toolkit’. At the end of the day, no matter how smart an idea is, any investor needs to see that the team have enough grit and enough passion to see the project through. The road to startup success is bumpy to say the least, and an investor needs to see the team has what it takes to stick it out and to cross the finish line, only then will they be willing to part with their cash.
If your founding team has limited experience, you should consider bringing in a team of advisors or even additional executives who can bridge your knowledge / experience gaps and make your team more convincing. Even if your founders are industry veterans, more experience and more knowledge is never a bad thing; that’s why we build out such a comprehensive pool of expertise at all our startups. See more about this here.
2 A quality product. One of the hardest parts of a seed round is successfully getting your proposition across. Even to an industry veteran, this is near-impossible without some form of proof of concept. At Fountech Ventures, our team is a rare blend of academic, technical and commercial excellence, which allows us to build out a PoC at a rapid pace, typically in 6 months or less depending on the product. An MVP is a much tougher beast, which is why we typically work through a series of small steps, validating and de-risking the business model before burning through millions on development.
It is worth noting that raising funding is certainly still possible without a PoC, but being able to give tangible evidence of progress, and some form of product demonstration (albeit often the PoC is only a fraction of what the planned MVP will become), really helps to win over investors and help them see the vision.
3 Early validation. Whilst investors from within your industry may be convinced by a strong team, a quality product and a compelling vision, non-specialists will want to see that there is a consensus of value amongst those who know best. Whether you are a first-time founder or have launched numerous successful startups, there will always be things that fall outside of your wheelhouse. Bringing in external parties with comprehensive experience in a relevant domain can work wonders for convincing even the most sceptical of investors that the idea has value.
Typically, we encourage our portfolio companies to engage with academic institutions, and secure University partnerships with relevant expertise. This acts as proof that the very organisations that produce enormous quantities of high-quality research around a particular domain believe that the idea in question is worthwhile. For example, AutoM8 is working closely with the University of Nottingham, where both the Computer Science and Engineering faculties have vast experience in the development of connected and autonomous vehicles, and strong links with UKRI Trustworthy Autonomous Systems, one of the largest research exchanges in the sector.
4 Proof of traction. Again, non-industry investors need to see evidence of value, and proof of traction is exactly this. Think pilot customer engagements, blog post interactions, social media discussions and the holy grail — partnership agreements. This includes everybody from potential suppliers, customers, third-party sellers, and everybody in between. If you can provide real evidence that the market is interested, then winning over investors will be significantly more straight forward.
One of our portfolio companies, SPRYT, was recently admitted to the Edison accelerator ran by Wayra, which gives access to the GE Healthcare ecosystem. Partnership with recognisable organisations just like this is exactly what investors want to see.
Proof of traction is not the be-all-and-end-all. However, for founders without a proven track record, even if you have the greatest idea the world has ever seen, most investors will be reluctant to put up significant capital without quantified traction.
5 A real opportunity. Once a potential investor is convinced that your idea is viable, your team is investable and the market is interested, they will want to get to the bottom of the actual opportunity that you are offering them. This is where a well-rehearsed pitch becomes your lifeline.
An investor will expect to see concrete information on the total available market (TAM), as well as the subset that will make up your serviceable market (SAM) and its landscape. They’ll also want the most persuasive evidence possible to back up your claims that you can achieve your target customer base.
Next comes your business model, which tells a potential investor how you are going to convert this customer base into actual revenue, and in the longer-term, profit. It will also show how you plan on scaling the business.
Finally, they need to see the specific details of your fundraising round; your pre-money valuation, the size of your raise and what purpose the capital will serve as well as any shares allocated via an option pool. This is where your roadmap and budgeted expenditure comes in.
With all this in place, you should be in with a good chance of getting some investors onboard. But anything you can add in to strengthen your case or sweeten the deal is of course preferable. This can include SEIS / EIS allocations, which if you are able to gain advanced assurance, can protect an investor from around 50% of the risk exposure. This means they are significantly more likely to take a risk and invest in your startup.
Step 3: Getting in front of investors
The pitch deck
Once you have all the above in place, the next step on the fundraising journey is collating the information in a way that makes it presentable, digestible and attractive to potential investors. In practice, this comes in the form of a ‘pitch deck’ that addresses the bulk of what your investors want to know. For an early-stage funding round, some of the key metrics that an investor is interested in are customer acquisition / churn predictions, customer engagements, cash flow, profit & scalability as well as of course, the predicted ROI.
It’s a long process, so be prepared for that. In the run-up to a funding round, every member of the team will spend more time formatting PowerPoint slides than they ever want to remember, but it becomes worth it when the finished document is put together and you are ready to start raising.
The lead investor
To get the process started, you will need a lead investor. Finding at least one is crucial in setting up your round. Whilst lead investors often come from institutions, private investors are equally capable of taking on the position if you believe that their network is sufficient to bring in the level of funding you need for your round.
Choose wisely, since the lead investor will help you confirm the specifics of your round so make sure they are the right fit for you. They need to understand both the vision and the value of your startup. At Fountech Ventures, we typically look to lead at Seed and Pre-Seed, then step back at Series A to let commercial funds take the reins.
Sometimes, your lead investor will come from your existing network, which streamlines the process but can also bring high levels of emotion into the situation, so always weigh up your options. You can also find a lead investor by approaching VCs, asking around in local angel investor groups or reaching out to industry experts.
Getting meetings booked
Whilst the lead investor will help you bring investors into your round, your work is far from done. They typically give you leads, but it is the team’s responsibility to follow up on them and create more. To do this, you often need to reach out to local investment forums, make use of your LinkedIn network, ask previous colleagues or industry contacts you have made over the years. Use your network. It is your best asset for finding investors. Most importantly, don’t exclude anyone. You never know who has a bit of spare cash that they are looking to invest.
To dispel a common myth, you don’t need to have an address book that looks like a Forbes list to raise investment. In a previous role, we reached out to a huge number of people who the founders already knew, and a good percentage of them invested. Whilst a shorter term sheet is easier to manage, a handful of friends putting in what they can afford can quickly start to fill out your round.
The actual pitch
The most overlooked yet crucial part of the process is undoubtedly practice. It pays dividends to rehearse your pitch as many times as you possibly can, or even recording yourself if you feel comfortable doing so. Bring in friends or family to listen in from an outside perspective and give you constructive criticism on your technique. Learn your points so that you can address your audience and talk around the subject rather than reading directly of the slides like in a high-school presentation.
Your slides should contain all the relevant information so that it can be used to show other potential investors or for finding key information, but you should also be able to talk outside of the slides in a natural and clear manner.
Go into meetings with enough confidence to win over investors, but not too much that you seem arrogant. As is often the case, it is all about balance when pitching to investors. Keep your wits about you and be on the ball but give your potential investors the chance to speak and to ask questions.
Just as important, ask them questions. Ask what their understanding is of your industry / market space, and pitch to them rather than at them. For industry professionals you can get right down to the details, whereas for those who don’t know your industry, you may find you need to explain things in layman’s terms.
Step 4: Closing the deal
Getting the signatures
When it comes to closing a deal, timing is everything. At the end of a pitch when an investor says they are in, determine next steps as soon as possible, preferably before the meeting has even finished.
Investors are busy and could easily be in contact with hundreds of startups at any one time. This means they do not have time to chase you for documents. Create a digital space that can be used to store all the relevant documentation an investor may want to review before making a final decision. Having these documents available eliminates the need to keep going backwards and forwards on email. Be cautious not to include anything you don’t want them to see, and make sure to use formats that are easy to access.
Waste no time in getting their signatures and adding them to your cap table, and if you want to, you can even provide those who are ‘taking the time to think about it’ with updates as you get close to your target. This creates a sense of urgency and can help to spur them on.
Knowing your value
A mistake a lot of inexperienced founders make when raising early-stage funding is settling. There are more investors looking for suitable startups than there are startups worth investing in. Use that to your advantage and don’t give away half your business to the first person waving a £10 note.
If a potential investor is looking to devalue your business when others have agreed to your valuation, be prepared to walk away. Not all investors are a good fit for your startup, and not all seed capital is worth the strings attached to it. More often than not, you will come across an investor who treats your raise like an episode of Dragon’s Den and starts trying to bargain with you for a different rate. Unless they actually bring Peter Jones’ style value to your business, then be clear yet professional in taking a deal off the table. On the flip side, if potential investors are frequently questioning the validity of your forecasts, don’t let pride get in your way and be willing to review terms.
Equally, be prepared for rejection. You may follow up on a lead for an investor to turn round and say they are not interested before you have even pitched to them. This happens. More than you might expect. It is easy to feel frustrated, and like you haven’t been given a chance, but every investor has a different risk appetite, and some may not be willing to invest in any business that is pre-revenue. In such cases, respond in a friendly manner and thank them for their time regardless. Keep relationships friendly, as an investor who says no to your Pre-Seed may come back with a great offer at Series A.
If you are looking to raise early-stage funding in the UK it pays to always be the most prepared person in the room and expect to be scrutinised by potential investors. Be confident in your valuation and know what you are looking for yet be humble and adaptable.
Fundraising is brutal and can often be deflating but keep hustling and follow up quickly on any leads. Most importantly, treat all potential investors with respect and kindness, avoid coming across arrogant, and make sure to keep any commitments you make. Present yourself as somebody they would want to work with, and you will quickly find that your investors become one of your greatest assets, supporting you to scale your business.
That’s where we at Fountech Ventures can come in, to guide deep-tech AI founders through the wilderness that is early-stage funding. If you want to know more about how we can help, or to discuss any of the points raised in this article, feel free to reach out to me at email@example.com.
Alex Bridgen, Junior Associate at Fountech Ventures — venture builders of deep-tech AI startups. Financial Economics undergraduate with a passion for fast cars, big ideas and even bigger challenges. He has a strong track record in UK & Pan-European investment banking/asset management, local government, project management, business development and venture building.
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