Insights from a startup investor: Tips from VC Kiran Mehta
Get inside the mind of startup investor Kiran Mehta from Mercia Ventures for expert tips and inspiration on startup inve...
Managing to raise funding for your company is difficult at the best of times, but it becomes even more fraught than usual when you’re also faced with an uncertain economic climate, as is the case currently due to the coronavirus outbreak and its potential economic consequences.
In these instances, tactically selecting what instrument to use for raising becomes even more critical to the thriving of your company.
Broadly, there are 4 types of avenues to raising:
- Funding Rounds
- SeedFAST (Advanced subscription agreement) – the investor invests now, and that investment will convert into shares at your next funding round. This is a great way to bind investors that are ready to pay, to a round that is almost certain in the near future.
- SeedNOTE (Convertible Note) – a short-term debt that converts into shares at a later date, and more often than not carries an element of interest. This is particularly attractive to investors who are not looking for any form of SEIS/EIS tax relief.
- Instant Investment – a bridge investment consisting of a cash injection, usually by your existing investors between funding rounds. Bridging in this way is an incredibly useful tactic, and works well especially if you are looking at a runway extension or some fast cash.
Without question, opening a new funding round right now will prove difficult although not impossible. Here is a handy list of investors who are still currently active. If you find yourself in the situation of being mid-round, it’s probably best to close it now with the investors that you do have committed, and issue those shares rather than wait any longer for more investors to join the round. It’s also sensible to allow for Instant Investment in your funding round, and it’ll be easy to top up the round afterwards when the investment community kickstarts again.
For more on how to close your funding round quickly in these times, it’s worth reading this article (linked above) from the SeedLegals team.
The other three alternatives to a Funding Round (SeedFAST, SeedNOTE and Instant Investment) offer a quick and efficient means of raising. In deciding which one of them is most suitable for you, there are a few questions worth asking:
Do you have a previous investor who is willing to invest again?
In this case, the ideal solution is to use the Instant Investment tool, which makes it easy for your existing investors to top up after they have previously been involved in one of your funding rounds.
Do you have a new investor who would like to invest for the first time?
You have three options here: Funding Round, SeedFAST or SeedNOTE, in this order. If you can push to a priced round, do it.
Do you have a Friends & Family investor or one which can invest now and negotiate terms afterwards?
If the next round is a certainty, you can use the SeedFAST to secure the investment, or use the Instant Investment tool if the round is imminent – in this case the investor gets a subscription letter and can be attached to the Shareholder Agreement that comes into place as part of the funding round.
A SeedNOTE is probably unadvisable since it would entail accruing debt and paying additional interest in a scenario where you actually don’t need to offer such favourable terms in order to secure the investor.
Lastly, although the above are the most widely used instruments, it’s worth seeing if you can gain access to alternative avenues to funding as well, such as exploring furlough, bank loans or government grants available to your business (a selection of governmental financial aid schemes during coronavirus is available here). Ask yourself the question, “what am I really trying to achieve here?”, are you fighting to stay alive to see what the other side looks like or do you need funds to push on with significant growth regardless. The answer to this question will help you identify which avenue to take.
