If you’re sitting somewhere outside of the start-up ecosystem, the media can make you believe that there is tons of liquidity floating around the UK that’s waiting dormant to be utilised by green-eyed entrepreneurs. But the unfortunate reality is that it’s never been easy to raise money to innovate and build companies from scratch. Sorry for bursting your bubble!
It has been difficult for us to raise funds at CityFALCON as a product company trying to take on the big players in the financial services world, but we are thankful to have made it through the toughest stage. We’ve managed to raise £620K from friends and family, as well as through a crowd-funding round on Seedrs. Let it be known that without these people, there is no doubt we would have struggled.
As I’ve said several times in other posts, there are NO rules, and what we are sharing here is our experience from chatting with 50-100 investors – angels, VCs, institutional investors. And, of course, there are exceptions 😉 Let me tell you an entrepreneur’s version of how to raise money for a start-Up in the UK.
Why is the UK so risk-averse?
People often choose the ‘safe’ option
It’s not generally a natural instinct to seek returns on your money in the UK; most people want to leave it sitting idle in the banks because it’s safer. There are also a number of personal obstacles potential investors have to consider, like large monthly commitments in mortgages. Even with tax benefits like EIS and SEIS that come along with investing in a startup, it’s difficult to ask people to take risks with their money. Additionally, uncertainties such as Brexit and the falling Pound certainly haven’t been helping.
The UK isn’t the Valley
The ratio of exits in the UK to exits in the Valley is not great. We don’t yet have the notoriety in the UK for consistently churning out start-up success stories, which makes investors much more cautious to part with their money than they would be in the Valley. This isn’t only because there’s an absence of money in the UK, but also because we’re lacking the overall start-up success-and-failure experiences to prove start-ups here are worth the risk. Unfortunately, with several entrepreneurs and limited investors, investors have a wide array of choices as to where they should allocate their money.
Entrepreneurs share the blame
It’s unfortunate but true. Sometimes fundraising successfully can be like pulling teeth, but we entrepreneurs also play our part in turning off investors. As an example, it’s quite common for companies in the UK not to update their angel investors on their progress. This garners a feeling of apprehension about investing further in other start-ups, and for good reason. This is an easy problem to remedy; at CityFALCON, we make sure to update our investors within the next 10 days of each month!
Additionally, it’s common for start-ups to spam their potential investors, but that’s unfortunately not going to get you the capital you need. Throw in the unfair risk-reward ratio of VCs, who take a lower risk at Series A and later stages but demand high returns on their complex and unfair term sheets, and you can be completely undervalued as a startup.
Media should not be trusted blindly
This is one of the golden rules of approaching the world, whether in politics, finance, or any other field. Sometimes it’s easy to forget how susceptible we are to biases from the media, but they make us culpable when we believe everything they say. The media only wants to talk about the minute percent of large fundraises or substantial fundraise failures, which gives us a very narrow view on the market. We’re less interested in hearing the stories of the rest of the start-up ecosystem, where entrepreneurs are constantly struggling to raise enough money in a world of uncertainties that currently include Brexit and the falling Pound.
2 factors that affect your ability to raise money for a start-up in a risk-averse environment
- “VCs invest in their friends” is what you’ll hear a lot in the valley, and it’s true in several cases. When you see an early stage investment from a VC, one of the key reasons is usually that it’s based on of existing relationships. You’ll also find examples of people working for VCs who start their own companies and consequently get their first investment from those VCs.
- Investing is not merely about an idea, rather the ability of the entrepreneur to execute on that idea. Strangers don’t usually invest in you. However good the idea may be, they will almost always find a reason why they shouldn’t invest.
- At CityFALCON, one of the first big investments came from my ex-boss, and several of my ex-colleagues at Skype got us to this stage.
- Given that relationships are so important and difficult to build just when you’re raising funds, most young entrepreneurs may, unfortunately, struggle to raise enough funds in the UK.
2. ‘Fear of losing out’
- If you don’t have the necessary relationships, then this is really the only other way to get funding.
- The UK is obsessed with traction and ignore other reasons to invest in an early stage company – technology, product, and team. If you can show users and/or revenue, people will be interested in your product. For example, in 2013 Done NGuyen developed the mobile game Flappy Bird, which quickly gained in popularity. By January of 2014, Flappy Bird was the most downloaded (free) game on the IOS App Store, and Nguyen was making $50,000 a day in revenue generated from sales and in-app advertisements. Investors will of course run to invest in such a company.
- Big exits bring attention. For example, Magic Pony Technology, originally incubated under Entrepreneur First, was recently bought by Twitter for $150 million (£102 million). For obvious reasons, this exit may bring more interest in companies under Entrepreneur First.
- Serial entrepreneurs may find it easier to get funding because they have “exited” before and shown that they can make money for their investors. For investors, this is an option that seems less risky than investing in first-time entrepreneurs.
Luck and timing
- It’s obviously unlikely to succeed purely on luck and timing, but you will need a bit of both ingredients in your entrepreneurial recipe to accompany your skill and passion.
- Being in the right place at the right time can get you connected with the people that will help you, or even give you the impetus for your original idea. This isn’t something you can plan for, but what you can do is put yourself out there to attract the right moment.
- Capitalise on the opportunities presented to you, and don’t let the people you meet slip away if you think they can be helpful in the future.
Don’t be afraid to walk away
- Desperation isn’t an attractive quality, and this applies to start-ups as well. Keeping your integrity intact is just as vital as gaining the funds to execute your business idea, so if you feel that an investor is giving you the runaround, it’s okay to move on.
- Your time is also an investment. If you’re investing more time and effort in negotiations than your investor, ask yourself how likely you think it is that the investor is interested in moving things forward. If the answer is “not very likely” find someone else who is genuinely interested in your idea and actually worth your time.
The above factors are very important to consider when pitching to different investor audiences. For example, the majority of the time I’m pitching in the UK, I ignore the problem/solution format and start with traction. Creativity, demonstration of the risk of losing out, strong leadership, and the willingness to form solid relationships with investors will all help you raise the funds you need; believe in your company, and you’ll eventually get that start-up capital necessary to bring your business to fruition. Fundraising is one of the toughest things I’ve done in my life but at the same time it has been very fulfilling.