Entrepreneurs looking to raise early stage finance are faced with a rich but complex ecosystem just at the time when they have much else to do and little experience of this opaque market.  This and related posts provides some independent views based on personal experience of leading or by being directly involved with more than 100 funding rounds.  In addition, I have directly created and raised funds for six companies and completed numerous exits.

Early funding rounds can have a significant effect on the future direction of the company so it is always worth taking the time to understand the options and develop a funding strategy.

First a few quick scene setters:

  • investors will look at many opportunities and invest in a few, rejection is part of the routine,
  • investors are likely to give you many different rejection messages so try to filter out the noise and learn from the trend,
  • aim to learn from each meeting and refine the pitch as required,
  • prepare well before taking meetings,
  • schedule meetings over a period of a few weeks to give you time to modify the pitch based on feedback,

A related post describes the funding options in more details but a general observation is that there are many diverse options available to help the entrepreneur establish the business and navigate the high tech ecosystem.  Funding sources range from individuals through angel networks to accelerators, incubators and early stage funds. A relatively recent additional option is crowdfunding which is very suitable for some companies.  Each will offer a different combination of services and benefits, most are geographically constrained, some focus on specific market sectors.  So take the time to research the different options and understand how they can help you to accelerate the business, gain visibility in the ecosystem, reach customers and close further funding rounds.

If you can reach relevant high net worth individuals directly through your network then this is likely to be the most direct route to closing a seed round.  Accessing angel networks can take longer since many have a formal process to select candidates and then present them to the membership.   Incubators and accelerators generally provide four programs a year so again,  it takes time and planning to get on the better courses.

It is also useful to have an understanding on the impact different sources of funding can have on the process.  Individuals tend to invest in to companies that qualify for SEIS/EIS (see related post) tax relief.  This gives the investor attractive tax breaks both at the time of the investment and on exit (good or bad) but does require the company to maintain its qualifying status for three years from the investment.   Most start-up companies are likely to qualify but it is important to review the scheme terms and conditions, and obtain advanced approval (see related post), a process that can take a few months.  Some incubators and accelerators invest through a limited partner fund which can be considered a separate funding bucket.  This is important since since the total amount that a company can raise through SEIS is £150,000.  Due to the highly attractive tax relief level of 50%, an SEIS round can be some of the easiest money to raise.

Most companies will require several rounds of fiance, so it is worth thinking several steps ahead and matching your funding needs with key milestones in the journey from start-up to profit.  Existing investors will want to see progress before committing new funds and new investors will want to see planned progress.  Failing to manage this will make fund raising more difficult and result in greater dilution to founders and existing investors.