Fundraising: The first steps

Never mind how you’re going to get funding, what should you be asking for in the first place? We report on how to determine what type – and amount – of finance you need.

They are big questions for any company: how much money do I need to raise to take my business to the next level, and what type of finance should I seek? And while there are no simple answers to these questions, there are ways to determine your strategy.

Tariq Dag Khan, chief marketing officer of Rated People, says, ‘Raising capital is directly linked to how you are going to make a return on it. And how you are going to make a return on it is directly linked to your understanding of your industry, your customers and how you are going to be better than everyone else.’

In February this year, Rated People, which is an online marketplace for homeowners to hire and recommend tradesmen, secured a £3 million investment from London growth investor Frog Capital. The investment enabled the business, which was founded in 2005, to continue recruitment and invest in its online and mobile applications.

Khan, who is also an operating partner at Turnstone Capital and has worked for alternative online lender and telecoms business NimBuzz, says the first step for a company seeking equity or debt investment is to figure out how quickly the business can penetrate or grow in its market.

‘With Rated People, the big challenges for them were that they really didn’t know how much money they needed, how to grow the business or how they were going to create success,’ comments Khan, who joined the business six months ago.

‘It has really been my responsibility to figure out what channels and activities should be pursued, and what should be done to drive the future growth of the business. We are in the process of looking at raising additional capital because we now know what we need to spend in order to achieve certain milestones.

‘In selecting the type of capital that we want to deploy, it’s a matter of where to go to get the best deal. In our case, it is still growth capital because we are not a private equity-type opportunity – we don’t have enough years or stable cash under our belt – so the obvious routes are venture/growth shops such as Frog Capital.’

Another company to secure finance from venture firms is mobile phone technology company Ubiquisys. Founded in 2004, the Swindon-based business produces “femtocells”, which are devices that allow multiple mobile phone connections in a home or business setting, usually in areas where coverage may not otherwise be available.

Expansion Funding

In July last year, the business secured $9 million (£6 million) of funding from a consortium of venture capital firms for expansion into new markets. The round was led by 5 Continents Consulting Group and involved the company’s existing investors – Advent Venture Partners, Accel Partners and Atlas Venture – as well as the Japanese venture capital firm Yasuda Enterprise Development as a new investor.

Three months later the business attracted $5 million in equity investment from three Taiwanese companies: SerComm Corporation, UMC Capital Corporation and Pacific Venture Partners.

Keith Day, vice-president of marketing, agrees with Khan, saying that figuring out how much finance a company needs comes down to the business plan, as well as the view of the market.

‘There are a number of things that you need to take into account,’ Day continues. ‘How much is a big question, and I can’t give you a scientific equation. In the end you have to produce a business plan and that plan spits out a number.

Then you have to add a lot of resilience to your plan to make sure that you can cope with new opportunities and a bit of unpredictability.

‘The interesting thing is, there is more to fundraising than funding. One of the things that our venture capital investors brought, as well as funding, was long-term guidance – the expertise, experience and track record that comes along with it.’

When it comes to negotiating an investment, the valuation of a company can become a sticking point.

Alan Stewart, corporate partner at the Glasgow office of law firm HBJ, says disagreement in this area can mean the death of a deal. He explains, ‘Quite often there is a bit of a mismatch between the entrepreneur’s ideal value and the investor’s ideal value; and quite often that kills the fundraising before you get off the ground.

‘How do you rein in the optimism? It is actually quite hard to do without falling out with the person, because in some respects you have to be the absolute devil’s advocate.’

Who to go with?

For Nadim Saad, the co-founder of FinanceACar, the difficult task was not fixing a number to the amount of finance the company needed but judging which finance provider to select.

The London business, which was a winner of start-up incubator Seedcamp’s European programme last year, enables car buyers to compare prices for a new car online. Saad closed a first funding round for the online car marketplace in August this year.

‘We were too early-stage to go for a significant round of funding, so we decided to go for a small Series A because of where we were in our development,’ Saad explains. ‘We launched our product in January 2010, so we had only been around for nine months. It takes time to establish, particularly in the finance industry and the auto industry.

‘We had meetings with almost every respectable VC. I know most of them as I am an investor in Seedcamp, and having also won Seedcamp funding it was obviously relatively easy to get meetings.’

After meeting a number of venture firms and entertaining some serious offers, Saad says he settled on an investment from private equity firm Anthemis Group and several angel investors because they suited the stage that his company was at more than venture capitalists did.

‘We wanted to bring the right investors in, and at the end of the day it is not just how much the company is worth, but also how much equity you are going to give away,’ he continues.

‘Every single company is going to have a different industry and fundamentals, but making sure you understand your market, having a solid business plan and knowing how fast you can grow before you go out fundraising will lead you towards the best possible result.’

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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