So, you have a great concept and you might have raised some initial funding from your friends and family, but now you’re ready to start growing the business, make your first hires and start that marketing machine.
But your bank won’t lend to you. You’re too early for any institutional funding like venture capital. Instead, you’ll probably need to complete a funding round with smaller, private, so called “Angel” investors.
They don’t like backing ideas, especially if you don’t have a track record. They like backing validated propositions.
So before you think about contacting angel investors, you need to go through step 1:
1) Validate Your Idea
Conventional wisdom tells you to write a business plan. Then go out to investors, raise money. Build our product or service. Then we design a comprehensive launch strategy. Finally, we release our product to world! And more often than not we fail, for the most part because there’s no market need.
Most investors have learned that this approach is not fit for purpose and now look for entrepreneurs that put learning and feedback at the heart of everything they do.
You should take a scientific approach to your venture when testing variables, get feedback from your potential customers as soon as possible and rinse and repeat a “Build - Measure - Learn” cycle.
But you still need money first to development your “Minimum Viable Product” to get feedback, right?
In reality a minimum viable product is whatever takes to get feedback, allow you to iterate and prove your proposition. You can find some of the cleverest examples of entrepreneurs validating here.
Once you have some proof points that you’re onto something and you have decided who would be a good member of the founding team, it’s time to make if official:
2) Get Your Company In Order
If you haven’t yet registered your company, now’s the time. It’s a really easy process in the UK - taking you about 20 minutes and costing you £12.
As part of that process you need to assign shares to the founding team. Having this clearly defined can save you a lot of arguments down the line. There’s even a handy founder equity calculator that you can use as a baseline. Though some, including Silicon Valley’s top accelerator think equal splits are the best way to go.
There are a couple of other bits of housekeeping to do. Firstly, as founders are rarely formally employed by an early stage company you should have a founders’ agreement in place detailing roles and responsibilities for everyone, to settle any disputes that may arise and put in place an appropriate vesting schedule. You can create these initial founder documents here.
Secondly, make sure that the number of shares in issue in the company is sufficiently high to be able to conduct a funding round. If you only have 10 shares split between the two co-founders, you won’t be able to allocate equity precisely to potential new investors (think about how you would give away 6% equity with only 10 shares - you can’t give away 0.6 of a share).
If you already have registered on SeedLegals, you can do a share split easily in one click to make sure you have enough shares in issue.
3) Prepare Your Investment Case
At this point, you’ll need to translate your vision and traction into an easily digestible format. At the seed stage, this nearly always takes the form of a pitch deck. Long business plans for most industries are superfluous and might even be a total turn off. You can find inspiration from these fantastic pitch decks, and ensure to always include these 11 essential slides.
As part of the investment case, you also need to break down and justify how much you need to raise, what your valuation is, what you’re going to use the money for and explaining how your investors are going to get a return on their investment!
Often working out what value to assign to a company is one of the trickiest things a founder has to do. Here are two straightforward methods that most UK startups use to decide a valuation. In addition, be sure to check out similar companies in your sector on Crunchbase or Startup Tracker to see their valuation history.
You should always talk about your valuation in the pre money form (i.e. what is it worth before the investment is made) as funding rounds are often a moving target and you don’t want the valuation to change every time an investor wants to participate or even drops the deal.
You can easily see your pre money valuation on your funding round dashboard in SeedLegals, as well as how much equity you are giving away.
These two figures, although on the surface appear simple, are often the source of a lot mistakes when founders first present their deal to investors. So always be on the safe side and modelling your round beforehand. You can model your pre- and post-money valuation for free by signing up to SeedLegals.
In the UK, many investors also will only invest in businesses that have received SEIS Advance Assurance - an approval process that lets investors get tax relief from investing in early stage startups. To get approval for your company, you’ll need to line up a few initial investors to add to your application to demonstrate investor interest.
Apply for Advance Assurance easily online here. (and for those familiar with the scheme be aware that the criteria for SEIS Advance Assurance changed in January 2018, and the official application form available on HMRC is not yet up-to-date in line with these so consult an expert to avoid wasting time by being rejected). Once approved, you can use your new ‘SEIS Eligible’ status to encourage new prospective investors to join your round.
4) Line up your investors
Most likely a founder already knows the people that will invest in their first round, they just don’t know which contacts will become part of the round.
Various social platforms mean that a founder’s social reach is greater than ever before. You should mine your contacts and make your case. It’s always a good idea to make sure your early investors are from your company’s sector so they know the problem you are solving - this will stand you in great stead in terms of being able to draw on their experience and contacts, but also win you the confidence of even more potential investors. When you’re approaching people that you know don’t think of it as support - you are offering them a piece of an exciting, high growth business. Angel investment is known as ‘smart money’. Angels are hands-on by nature, so always be sure they can bring value to your company too.
To understand the potential of your wider network better, try upgrading your Linkedin account to Sales Navigator. Search your 1st and 2nd degree contacts according to keywords and sector experience. A warm introduction to a potential investor is much more likely to have a positive result - so be strategic and targeted in your approach, securing warm introductions wherever possible.
Other avenues to consider include crowdfunding sites like Seedrs and CrowdCube (though to be successful on their platforms you will likely have at least 30% of your total round already committed). And check out the various angel investment groups across the UK.
5) Negotiate Your Round
Once you have investors interested and committed to investing in your business - you’ll need to send them a summary of investment terms - called a Term Sheet.
It’s the front foot from which all the rest of your documents depend. Other than the valuation, there are a number of key terms that you’ll have to become familiar with to negotiate with investors. Term Sheets are where a large amount of negotiation can happen as they include not only the valuation but also things like vesting, reporting requirements and even your salary!
Once all your investors have signed your Term Sheet, next there are a series of longer documents that dive into more detail including the Shareholders Agreement, Warranties and new Articles of Association. Each needs to be signed by all parties.
6) Get Your Company In Order (Part 2)
Once the subscription agreement is signed and the money has been deposited, congratulations, you’ve just closed your funding round!
However, you are not quite out of the woods yet. You’ll need to send out Share Certificates to your investors, file your new Articles of Association at companies house, and update your company share register and file the relevant SH01 Form with Companies House.
After that, you can get back to work and build your business. But to conclude, there’s actually quite a lot to do and it’s easy to get it wrong. That’s why it’s important to get the right help: Help that saves you time, money and stress!