This time last year we completed our first external round of funding. I wrote a blog post shortly afterwards, but thought I could make it far better if I incorporated some of our slides, templates, documents and business plans as templates that other start-ups could use.
It’s taken me nine months or so to get it all together in a form I could share (removing some of the commercially sensitive data without reducing how useful the documents could be). I’ve not changed the original wording as I feel it still reflects the euphoria and fatigue at the time reasonably well!
I’m sure I would have saved countless midnight-hours if I could have accessed a complete set of business plan and fund raising templates for a start-up when I started this process – If only 1 entrepreneur finds them useful then I’ll be happy!
The Original Post…..
I’ve just completed my first round of external funding. We’ve raised over $500,000 at a fair valuation and I should be over the moon; but I’m not celebrating.
To be honest I’m a little tired and all those late nights knee-deep in spreadsheets have taken their toll. My eyes are sore, slightly red in fact, and I’m sure those big black bags under my eyes weren’t there when I started this process months ago!
If you’re an entrepreneur who has successfully raised money to fund your idea then this may sound all too familiar. If you’re an entrepreneur who failed to raise money then clearly you might feel a whole lot worse, especially if you needed the money to survive.
Running your own company is all-consuming; running your company whilst trying to raise money adds a massive burden on top of your day-to-day responsibilities. If only there was a better way.
I’m sure there is.
Whilst this may not be it, I hope by sharing as much as I can from my personal experience, that perhaps a few entrepreneurs who follow this path may be able to save a few valuable hours or days which they can better spend focusing on their idea and fledgling business.
You create a lot of documents during the funding process, probably even more if you go down the VC route. I’ve shared as many relevant documents as I can, and have sanitised the commercially sensitive bits, but hopefully it will be a useful template or food for thought for your own plans if you are considering raising money.
(Health warning: If you use any of the spreadsheets – then please check your own formulae. Don’t blame me for a subsequent dilution if one of my calculations lead to you getting your numbers wrong!)
In 2006, after many exciting years in the yellow pages market, I decided it was time to start my own business. I started a golf business with famous golf coaches, pivoted to a website redesign business and search engine optimisation services business before pivoting in 2009 to an SEO software business. I firmly believe that my experience of working with world-class golf coaches was the perfect grounding for building a world-class software business – but let’s save that for another blog post!
I’ve bootstrapped the business all the way, and in retrospect perhaps I waited too long before looking for external funding to really accelerate our growth. I guess only hindsight will tell.
Self-funded vs Investment
I’ve funded the business from day 1 from savings. We built and refined the product, won and lost our first customers, and I’m pleased to say, became cash-flow positive before we raised any external investment.
Eventually, we decided we needed to raise some investment to accelerate our growth. For me the key issue was timing.
The slide below shows the 5 key considerations that we took into account before deciding the timing was right to raise.
Taking these 5 points in turn:
1. Cash – I was lucky I had significant savings that I wanted to invest. But I did raise a £25,000 short-term loan from Santander – it took a week! I couldn’t believe how straightforward it was. (Tip: They seemed to be focused on how much money was going through the account. So large chunks of money (e.g. Shareholders loans and R&D Tax Credits) that went into the account during the year, even though they were not related to actual sales, seemed to support their estimates of turnover through the account which had a bearing on their positive decision).
We’ve been claiming R&D Tax Credits – this has been worth nearly £100,000 to the business. If you are building some cool technology then it has to be worth applying. We paid a consultant a percentage to help us prepare of R&D claims – there’s a reasonable amount of paperwork – but you could do it yourself.
The timing was right – we calculated that our desired product developments and research plans necessitated more cash than our forecast 12-18 month cash flows were likely to provide.
2. Positioning – We had built a solid (if unspectacular) track-record of success. We had won and lost our first customers, refined our approach and could show traction. I felt comfortable we could show good product/market fit and the story was an overwhelmingly positive one.
3. Execution – We spent a lot of time building our business plan, making sure that the assumptions driving the plan yielded results we believed in! We knew we’d be asked to show management accounts on more than one occasion throughout the fund raising process and we felt it was imperative that we could show we were on-target throughout this 3-6 month process.
We also built a less ambitious, “self funded” business plan – just in case no one liked us!
4. Competition – Our competitors are predominantly in the US, although we have a few in Europe. Between them they have raised $50m – not that much for a global market! Even though we felt we had a technological advantage, we needed to accelerate our product development plans. This meant building a bigger engineering team – and unfortunately they cost money!
5. Focus – Raising even a modest amount of money places a reasonable demand on the whole team. Whether it’s meetings, calls, pitches, business models, follow-ups or requests for information – they all take time away from the business! I only went down the funding route once I persuaded my wife to join the business. I’m lucky I happened to have married an amazing woman, who also happens to be a brilliant Finance Director.
With all the other factors coming together she joined with the express remit of preparing the business for funding and raising the money within 6 months (which she did a few days early!).
Clearly, marriage may be too large a commitment for other entrepreneurs, so my advice would be get on LinkedIn – there are plenty of non-exec Finance Directors/Angel Investors who could help you. You may even persuade one of them to be your first investor and you may be able to tap into their network.
In my opinion, this search on Yahoo.co.uk produces better results than LinkedIn’s own search facility:
site: uk.linkedin.com/in non-exec finance director angel
You may want to upgrade your account on LinkedIn to contact relevant people directly, or you can probably find links to their blogs or Twitter accounts.
Evaluating Funding Options – Angel vs VC
We pretty much ruled out bank funding (despite our positive experience with Santander) and decided we needed to raise Angel or VC money.
So much has been written elsewhere on this topic that I am not going to evaluate the relevant merits of Angel vs VC funding.
Back in 2006, I had joined London Business Angels with the intention of becoming an angel investor. I met some interesting companies and entrepreneurs, saw some interesting presentations but found it extremely hard to part with my own money. In particular, I always found the bio-tech companies’ stories so compelling with their products and solutions that could save lives. I also knew I could not add any value to those businesses and had no idea if their business was sound and would be successful. I thought I might as well just give £25,000 to my professional poker playing friend and see what return I could get! In the end I decided to invest in myself and start up on my own.
With my own experience of angel investing (or not as it turned out!) in mind, I determined that I needed to find angels that either knew the market really well or knew me or the management team really well; or I needed to find some VCs who liked ambitious software companies in the online marketing space.
To kick-off the process I decided to enroll on the Government Gateway 2 Investment Programme (now closed). I’m not sure why I did (maybe because it was free), this was most unlike me; it was tantamount to reading the manual before starting to use or assemble something!
But I’m glad I did. It turned out to be a very useful couple of days and I met and saw other entrepreneurs present and received some sound advice from the Angels and VCs that supported the programme (in particular Rose Lewis at Pembridge). We all had a chance to perform a practice pitch to a room full of VCs and Angels. They videoed the feedback which was really helpful. It went OK and a few people even went so far as to say they thought I had an investable proposition. (Can you believe some people weren’t interested in investing in us!)
My first slide deck was pretty dull (death by bullet-points) and is not what I would recommend, but I have shared a better (and successful) version I used later on in the process.
As always I got some interesting if slightly contradictory opinions but that is only to be expected. I know my old CEO would laugh if she heard someone describe me as “not ambitious enough” but that happened! On the one hand I was told I needed to present a plan that showed a reasonable and achievable growth trajectory not a huge hockey stick; on the other I was told that if I really believed there was a global market that I should be raising more money and going for it!
My takeaway from this exercise, was that investors want to see tremendous upside and a future exit, but they also want to see a well thought out plan with clearly defined steps showing how you will get there. I built this into future plans.
Fresh with a grounding in the whole investment process, some contradictory advice and a warm-feeling from knowing that a few of these experienced investors thought we had an investable proposition I set about planning the whole funding process.
Where do you find all these VCs?
I compiled a spreadsheet of all the VCs that I thought might invest in a tech start-up like us. At this stage, I did make a pretty fundamental mistake in assuming VCs who specialised in ‘growth finance’ were interested in funding relatively young start-ups who had some revenues and wanted to grow faster. It turns out they’re interested in supporting much larger companies (about >$1m revenues/Qtr and fast growing). I’ve left the full list in the spreadsheet just in case since I figured we might be looking for this kind of finance next time around.
I’ve created this as an open Google Doc so please feel free to contribute. Download List of Early-stage VCs.
How do you approach the VCs?
Most of the VCs listed have pretty clear instructions on their websites outlining the size of investments they make, the markets they are interested in, the companies they have invested in and their investment criteria.
- They’ll also have a process telling you where you should email your Executive Summary and in some cases Business Plan. They also say something along the lines of, “We receive x,000 business plans and only invest in a handful each year, so don’t be surprised if we think your idea sucks and we don’t want to invest”.
For me the notion of emailing a business plan to an anonymous person was far from appealing. You have no control over the process, you don’t know how long it will take to hear back (if at all), you have no relationship and you cannot fully explain and evangelise about your business and why it is an outstanding investment opportunity. At best I felt I might get a few appointments over the following weeks and months.
So instead I decided I’d try a different approach. I figured that I might be able to catch a few VCs when they were likely to all be in the same place at the Noah Internet conference in November 2011.
I divided my list up into Tier 2 and Tier 1 targets – and then emailed the Tier 2 targets first. (Don’t worry you don’t know who you are)! I wanted to refine my pitch, make sure I had all the answers to their questions and then be fully prepared for the Tier 1 targets that I figured might fund me.
So I prepared an simple 2 page overview of the company.
Rather than e-mail through their websites, I emailed via LinkedIn. This worked reasonably well for me.
I managed to setup 3 meetings (2 of which happened) and one of them kindly introduced me to another VC he could see downstairs from the balcony during the networking drinks. This lead to my first and only other VC meeting a few weeks later.
By this time my pitch document looked something like this:
These initial meetings gave me enough information to determine that this was going to be a long-haul. I’m sure second time around this process would be somewhat easier (especially with a successful fund raising round/exit under your belt) but I quickly determined that an initial Angel round would be a better bet, with a later VC round if necessary. Here’s why….
It turns out we’ve got some competition and that they’ve already beaten a path to the VCs doors! At least two of our competitors have been doing the rounds in Europe. And that means there are some pre-conceptions about us and our business model before we’ve even given the first line of our amazing pitch!
I did manage to get a meeting with a VC who expressed concerns about the scalability of our competitors’ business model, but my pitch didn’t manage to change his perspective. I figured Angel Investors are much less likely to have been pitched by our competitors.
One of the VCs I spoke to was kind enough to give me some sound advice (it turned out he was in growth finance and so we were not in his sweet spot). Key learns for me were:
• Expect to give away between 15% to 40% of your equity – whether you raise £300K, £500K or £1m you’re going to give away an amount of equity in this range
• Give great examples of possible exits and reasons why you might be a target for them, get some comparables on deals that have been done in the space
• The equity stake needs to be big enough to actually have an impact on the return for the VC and its Limited Partners – if you do indeed exit in 5 years time at your target valuation!
• VCs are looking for home runs – you’ve got to show an aggressive growth strategy and even if it follows the J-curve, you have to show the steps you will take to get there
I felt that I would have to change our business plan and more importantly our business strategy and raise much more money, give away a bigger chunk of equity and take bigger risks to try and grow the business at a faster rate in order to secure VC funding today. I felt that whilst the market is there, and I could go down this route, it could lead me to a position further down the line where I no longer had control of the business. For this reason, I figured going down the angel route now made more sense.
Where are all the Angels?
Before starting the round we decided to give our hard-working team a share in the business and set up an employee share option scheme.
It’s important to do this early on in the process, preferably before you start, as clearly you want a low valuation from HMRC for employees to get the maximum tax free gain possible on the shares. The closer you get to a £Mn valuation with prospective investors the harder it is to justify to HMRC that you should be valued close to £0!
We started by getting a draft agreement from the Institute of Directors (one of the advantages of being a member of the IOD is access to their business service team who can provide templates for many standard contracts including share option agreements) which we then got our lawyers to tweak. I think this saved us a few pounds!
With this organised we set about finding some angels.
A German entrepreneur I had met at the Noah conference said his advice to entrepreneurs was to eschew VCs and go to friends and family (he didn’t mention fools). He suggested copying BetFair’s approach and “Find 30 friends, ask them for £10,000 each and tell them it’s lost!” I don’t know whether BetFair did indeed do this or not, but the thought of trying to cajole, corral and align 30 small shareholders for a subsequent round or deal, let alone the first one, seemed like it would be a nightmare.
So instead I started with a short list of people who knew me, the management team or the market. I aimed to find 5 or 6 investors that could put in between £50,000 and £100,000 each.
I did produce a back-up list of angels by searching LinkedIn. This query on Yahoo.co.uk looked like it would give me a promising list of would-be investors:
site: uk.linkedin.com/in angel investors digital media
In most instances I was connected with someone who could give me a warm introduction. I also took a look at Angel list. (Fortunately, I did not have to use the backup list).
I approached my short list via LinkedIn (again) and directly where I had their emails. I used the same Executive Summary and Investment overview I had used for the VCs and sent them personalised emails.
In every email, I did not assume that they would be interested themselves but did ask if they knew anyone who might. This did lead to introductions to new potential investors.
I met every investor once, face-to-face in most cases and using Skype in a few. In addition to the slide deck we produced plenty of spreadsheets covering different aspects of the business. I have shared below two templates that you might find useful similar to two of the most important spreadsheets we used.
I appreciate all businesses are different, but the abridged business model template, much like the one we used, may be useful in helping you structure your own business plan (if only for the calculations we used for some key SaaS metrics and the valuation model). The numbers in the model are (quite obviously) illustrative simply to show how the model builds – although wouldn’t it be nice to run a business with a 90% EBITDA margin!
The second spreadsheet is an example Capitalisation table showing how your equity is diluted when you raise investment.
I did contemplate sharing the other documents such as the Articles of Association (but it’s pretty standard stuff) and an example shareholders agreement, but I feel you definitely need your own lawyer for this.
From Interest to Negotiation to Terms
Fortunately, by starting with people we knew and their contacts we managed to get enough serious interest quickly. After checking in with each investor individually we managed to get to a term sheet pretty quickly.
We had applied for advanced clearance to HMRC to ensure we were EIS qualified, as well as being important to potential investors, it also makes negotiations around the shareholders’ agreement much more straightforward as the tax relief only applies if there are no arrangements to protect the investor from the normal risks associated with investing in shares.
We found some great lawyers (never ever thought I’d put those two words together in the same sentence!) who are start-up friendly and concluding the deal with a handful of angels was relatively straightforward.
This process started in January 2012 and I’m pleased to say only took 3 months to complete. We were over-subscribed by more than 50%, but only took what we needed. I hope this was the right call!
Hindsight is a wonderful thing and, if permitted, it might be fun to update this post in two years time.
I guess I’ll never know what the impact would have been had I raised external funding at the start (in 2009) or if we’d raised more first time around in 2012. At the very least I’m satisfied that I managed to get the business to cash-flow positive on a monthly basis before raising external finance – if only for the knowledge that in the unlikely event that my plans for world domination don’t quite pan out the way I envisage, then at the very least I’ll be able to run a profitable business (albeit on a smaller scale).
The biggest lesson for me is that you need to be thoroughly prepared and organised. You will learn a lot during the process and hopefully you’ll get a positive outcome in the end, or at the very least a lot of constructive feedback about your business.
You’re also likely to spend a lot of time with your nose in spreadsheets and PowerPoint slides. I hope by sharing some of the documents we produced along the way, that it might save a few fellow entrepreneurs valuable hours that they can better spend on proving their concept and growing their business.
If anyone is interested in expanding on these files to create a free set of funding resources for the budding entrepreneur then please get in touch on Google+