Fund raising is a necessary activity in most high tech venture backed companies. However, there is little independent guidance to assist the first time founder and experience entrepreneur through this complex and critical process. This series of posts aims to close this gap with advice from individuals deeply familiar with the process. Not all companies are suitable for venture capital and not all companies have the requirement for a series of large funding rounds.
Founder Equity:
Equity is a zero sum game where all the participants have to trade their absolute holding against the potential of a larger pie. Founders start with 100% of the equity which is diluted as they trade equity for cash to fund operations and grow the company.
Stages:
For most companies fund raising is done in a series of steps reflecting increasing maturity and cash needs. Rather than rush to the most obvious sources of cash, it is important to think through the steps as a whole since the early rounds can strongly influence the direction of the company and limit possible sources of follow-on finance.
Seed stage is the first external funding round typically completed by friends, family and individuals in your extended network. In the UK the tax efficient SEIS scheme underpins most seed rounds.
Early stage rounds are possible through a wider range of sources from angel networks to early stage funds and crowdfunding. They may also include support from and incubator or accelerator. Again the tax efficient EIS scheme is critical to supporting this portion of the market. The median seed/early round is stable at $0.6 million
The Series A round is used to scale the company from first product to wide scale adoption. This is the stage at which conventional venture capital funds invest and family offices and corporate venture capital become an option. The median Series A round in the UK has grown from $ 3.8 million in 2010 to $ 5.1 million in 2017
Later rounds are used to fund expansion and to enter adjacent markets.
In Europe $ 36 billion was invested in venture capital rounds during 2019 of which $ 10 billion was invested in UK based companies. For more detail on the UK and EU venture capital market, refer to the various reports in the Insights section.
Sources:
The UK high tech ecosystem offers many routes to fund early stage companies but the options narrow for growth stage companies where only a few funds offer true growth capital. See the links below for lists which include angel networks, syndicates, funds, online networks and incubators.
Validation:
At each stage, existing investors will be looking for progress before committing additional funds and new investors are likely to wait for key proof points to be reached before investing. Understanding what the key proof points are and building a funding plan around likely milestones is a major part of successful financing.
Process:
Investors have little incentive to rush into investments and so fund raising is likely to be a lengthy process. Typically a founder should expect to take four to six months to close a round. Unfortunately the activity consumes a considerable amount of founder bandwidth just as company performance is under the spotlight. Fundraising while continuing to deliver progress is likely to tax the most competent entrepreneur and particular attention must be given to this challenge.
Pitch:
The pitch document is key part of fund raising took kit used to engage with potential investors. Very early stage companies can use a short presentation but as the company matures the pitch will be supported by a business plan and financial model. The “elevator pitch” is a very short summary designed to catch the attention of potential investors in a few sentences. This can be used in emails and verbally as the hook designed to catch investors and lead them to engage further. Once engaged, they will wish to learn more and then test the key assumptions behind the plan.
Fund raising can be a difficult and time consuming activity for even the best ideas. Expect a lot of rejection, this is the nature of the process but it can be streamlined by being well prepared, focused and qualifying your target investors.
