Get funded or die trying – part two: Preparing your start-up for initial funding
So, you’re on the first steps to becoming an entrepreneur. If you are fortunate enough to have had the support of friends and family or the use of savings, you will have managed to develop a minimum viable product (MVP) and undertaken enough test marketing to define your brand, USP and business plan.
Phil Cooper on preparing your start-up for initial funding
That pre-operational period provides an advantage in the form of a narrative to your business plan. But to move into full, or even limited, business operations you will need to look at external funding.
Now unless you have a cure for cancer or have discovered a new energy source, I would steer clear of venture capital. VC is very risk adverse and until you have a healthy revenue stream, that’s you!
In July 2012, the government introduced SEIS (Seed Enterprise Investment Scheme) which allows higher tax rate investors to get up to 78 per cent of their investment back in tax relief. I’m going to fall short of providing specific details as there are, as you would imagine with any Government initiative, a lot to review. But a good accountant should be able to advise you, or refer to the details on the HMRC website.
The good news for you is there is now a queue of angel investors looking for opportunities to capitalise businesses under SEIS relief. I recommend trying:
- Angel Websites such as AngelInvestmentNetwork.co.uk, Angel.co, IBangels.co.uk, www.hban.org.
- A specialist SEIS operation like SeedEISplatform.com are definitely worth approaching. They understand what you need to do to qualify for SEIS and their investor pool is primed. They also run pitch events – useful personal interactions – not just relying upon electronic communication.
- Jensonseedeis.com is a fund set up just for SEIS investments.
- LinkedIn is a useful tool. Search for SEIS Investors or high net individuals in your sector that may have disposable cash to invest.
- Crowd funding allows you to get smaller investments from a wider group of investors. My favorite is CrowdCube.com.
SEIS is limited to £150k per company, but there is EIS relief, which is almost as attractive beyond that, again subject to HMRC guidelines being met.
All of the above are going to need a business plan with three-year projections. The goal of this plan is to explain what problem you will solve, your USP, your marketplace, how you will be positioned. It will describe who you are marketing to, and how you will reach them and how all of the above looks in numbers.
Focus on the first year and get some help from an accountant to expand the forecast into a cash flow forecast and to add a balance sheet. It will also be useful to have a condensed version in the form of a powerpoint presentation investment deck.
Above all, know your numbers and the relationship between revenue and costs. Will you need an extra wage to cover the increase in revenue in months 6-12, or can you get by with a part-time employee? The grilling the investors on Dragons' Den give would be entrepreneurs is real-life; you have to know your numbers inside out in order to convince them that your business is financially viable.
You will need resolve, determination and the ability to adapt. When you start pitching, listen to any criticism, and either build in some defence, or do some research and adjust your plan.
I strongly recommend you raise enough at this stage to get close to break even and certainly fully open your revenues. If you don’t you will have a hard time persuading investors to provide more funds if you hit speed bumps. Take it from me; I am in that exact position myself now, having not raised sufficient funds to take my latest business to break even.
Next week, I will discuss the pulse of the UK venture capital industry – the gatekeepers – and ask one what exactly they need to see to invest into your new business.
Phil Cooper is founder and CEO of Kippsy.com