The start-up business world can be cut-throat and many entrepreneurs are keen to raise money quickly to build their team and products.
Indeed, BusinessCloud’s daily news output features many details of such capital raises.
However giving equity away in your new business at the crucial early stage may not suit everyone, especially if they have the means to bootstrap the business.
We brought together a panel of entrepreneurs and experts to discuss the right time to take investment.
Should you invest your own money?
Investment veteran Chris Eccles has never forgotten his first experience of trying to raise money.
Aged 30 he was trying to take his Liverpool-based business through an MBO.
“I remember trying to raise money and one investor said to me ‘right son, what are you putting in?’” he said. “It was a lightbulb moment. I raised £100,000 personally and that made me the largest individual shareholder in the business.”
The business, now called ChargePoint Technology, was backed by US private equity firm Arcline Investment Management earlier this year in a deal that signalled an exit for LDC.
He said: “We were in year four with LDC. We could see all these market opportunities but in order to do that we need to make acquisitions of our own. We’re looking at opportunities in the US and Europe.
“Last year we had a turnover of £15m and an EBITDA of £7m. Every time we’ve taken investment we’ve grown the business on the back of it.”
Think outside the box
Tech entrepreneur Martyn Gould has no regrets about his ‘mauling’ at the hands of the Dragons on BBC’s Dragons’ Den.
Gould left empty-handed and was branded ‘delusional’ after asking for £250,000 for 2.5 per cent of his business yboo.
“It was a deliberate tactic to go on Dragons’ Den to get attention. If you’re an entrepreneur, you’re brave enough and you’ve put your life savings into a business which we did, why not go on TV and push yourself to the edge of your comfort zone?” he said.
“That TV appearance has done wonders for our new business. Everybody knows us. I pitched for a year to get funding for yboo and wore out my shoes. Now I don’t need to.”
Gould’s new business is called rightsignal and he warned people to do their due diligence before taking investment.
“We bootstrapped yboo for two years before raising investment,” he said. “We raised £250k but when the investors asked for their money back we had no alternative but to go into administration.”
Do due diligence on investors
James Bedford is the former head of investment partnerships at Tech Nation and warned people against rushing into taking investment.
Now the digital cluster development manager at STFC, he said: “You’ve got to think long and hard about taking investment on and what it’s going to do to your business.
“A lot of people start a business because they make terrible employees and they need to be their own boss. Do your own due diligence on potential investors. Do you want to be acquired and go on that investment journey?
“The worst pitch to any investor is ‘I’m running out of money, if you don’t invest we’re going under’. That sounds like you can’t manage your cash properly.
“In terms of your first investment, people are surprised at how much the investors expect you to have done before you raise investment.
“Get as much done as you can without any investment. The investor wants to see that this person can do X, Y and Z without any investment. Investors want to pour fuel on the fire but they want that fire to be going first.”
Bedford said the process of taking investment can take up to 18 months so do your due diligence before approaching an investor.
“A good investor will be used to being asked these questions,” he said. “Talk to the other portfolio investment companies about their experiences of taking investment.
“Be mindful of how much money you give away. I always recommend never giving away more than 20 per cent every time you raise because the investment journey might involve three or four raises before the exit.”
Exciting products in the pipeline
Preston-based tech firm Redmoor Health has enjoyed a record-breaking year after demand soared for their services during the pandemic – and is now being approached by potential investors.
Founder Marc Schmid said: “Before Covid-19 we were based predominately in Lancashire and Staffordshire. Now we’re working across the UK and most of London. The ability to be able to do things remotely has a huge impact.
“There’s a lot of investment going into digital health. We’ve got low overheads and our profitability is between 30-40 per cent. Our challenge is getting into more areas. We’ve had four approaches from interested investors and have some exciting products in the pipeline.”
At a crossroads…
Paul Woods is the founder and managing director of successful North West-based courier business Proactive Despatch.
As the only shareholder he’s been attracting lots of attention from potential investors.
“I bootstrapped my business on day one and I’m a 100 per cent shareholder,” he said. “I’ve had four companies reach out to invest in us recently. We are going to have our best year yet. We have to grow because nothing stands still in business.
“There’s a lot of complacency and lethargy in our industry but we’re passionate about customer service and have a good reputation in the North West.”|
Learn from your mistakes
Amman Ahmed’s latest business is helping de-stress 42 million cats and dogs.
He hit on an idea to stream music and videos to calm anxious animals through his businesses Relax My Dog and Relax My Cat.
However he said he’s learned the lessons from his previous music video app business Rormix, which attracted £250,000 in funding before being wound up.
“I was in my mid-20s at the time and it was a learning experience,” he said. “It was my first time as a CEO. I had limited options for investment and I was rushed into the process.
“Our investors wouldn’t commit to another round until we had other investors. My advice is to try and make money from day one. Your best investors are your customers.”
Raising investment isn’t a ‘slam-dunk’
Laura Simpson is the co-founder of online interior design company My Bespoke Room and has raised £2m in the last five years.
“We identified early on if we were going to be successful we had to invest in our technology to bring automation and ease of use to the forefront of what we do,” she said.
“We got as far as we could by bootstrapping before going for investment. If I could go back I wish we’d consolidated our raises into two larger ones (rather than numerous smaller raises). This may have helped us scale quicker and certainly would have saved us time out the business.
“We’ve always gone to angel investors and have around 40 on our cap table. We’ve always been really focused on getting the right investors who can add strategic value along the way. Our investors have been a great help. We haven’t needed to go down the VC route, yet.”
The entrepreneur warned that raising investment takes you out of your business for long periods of time. “What you think will be a quick three-six month slam dunk never is,” she said. “Do it right and do it well.”
Investors must be about more than just money
Chris Reid is the founder and CEO of Lancashire-based Connect Childcare and its software is used by eight of the top 10 nursery groups in the UK.
He said: “I founded the business in 2005 and bootstrapped it until taking the first of three raises in 2011. It’s quite lonely at the top so I brought in a non-executive chairman in prior to raising funds. By 2017 we were up to 30 staff.
“Our most recent raise was with Mobeus Equity Partners and landed at the very end of 2020. Any investor wants to see their investment work. If everything is going well their involvement may only be limited to a monthly board meeting.
“You should be able to discuss your issues with your investors and they should be able to help you. Their value should be bigger than the size of their cheque. Make sure the culture of the investor matches your culture.”
Ask tough questions
Jon Davage is head of corporate at law firm Bermans and said companies shouldn’t be afraid of asking testing questions of would-be investors or potential non-exec directors.
He said: “When it comes to taking investment don’t give away too much equity unless absolutely necessary. Also choose your lawyer and accountant carefully because they’ll accompany you on the journey.
“You need to be careful which investor you choose. Don’t be afraid to ask tough questions. In relation to NEDs, if you’re not sure work with them for a few months on a consultancy basis to see how you work together.
“Professionalise yourself as early as possible because it will help when you bring in investors. Have really good corporate governance. Act as though you’re a big company even though you may be a small one.”
* Glenn Cooper, chairman of St Helens-based Inovus Medical and the founder of bollard manufacturer ATG Access, also took part in the discussion – see below