In a time of some significance in the history of humanity how can one find reasonable sources of funding for startups. In this article we will explore the major sources of equity at the turn of decade of the new century while paying some respect to the Covid-19 global pandemic and it’s resultant effects on economies and the way we go about doing business now.
In this article, we will discuss how to raise money through:
- Venture capitalists
- Angel investors
- Equity crowd funding
We’ve all seen Shark Tank right? It may seem easy to pitch a business, but it takes a lot of preparation and skill to actually get it up and running and get the right backing for it.
It can be overwhelming for anyone, which is why it is important to create the perfect pitch to persuade a venture capitalist to support your business. There is a certain level of skill to create a successful pitch and not to scare people off, but only a few first-time founders get it perfect. This guide will make it easier for first time company founders to be prepared.
While it is important to pitch to a VC, you also need to create a press kit to communicate important facts that contains contact information and details about your business. The main goal of a press kit is to allow people who would like to feature you learn about your company without having to wait for singular response. So, you provide them with a complete package.
Now we have all experienced in some ways the effects of the still ongoing pandemic- Covid 19 and how it has impacted our society. But how beyond our news reports has it changed businesses and how we conduct business?
Impact of Covid 19 and necessary adjustments
Like all devices on this planet there is a good and bad one, which outweighs the other. There are some businesses thriving in this current climate: delivery services, Zoom app etc.
In terms of economic consequence it has become apparent that this current pandemic has done more damage than any other pandemic preceding it dulling comments comparing Covid-19 to ‘a common cold’. As of May 2020 Wall Street has followed the global sell-off with US index and individuals falling record numbers. Chinese manufacturing has been halted for over a month, which conversely effects the world economy. To cope with supply chain adjustments and other wholesome effects from commodities like oil to different co-dependent sectors fluidity becomes key to survival in the current global economic environment.
The fragility of the global economy, which has high levels of indebtedness and asset bubbles, is a legacy of the way in which the 2008 global credit crisis was managed rather than solved. As pointed out in the World Economic Forum’s Global Risks Report 2020, there are a number of tipping points in the economic system and the economic consequence of a shock to the global system is likely to be a correction.
Before you pitch
Now that most meetings are set for conference calls adhering to the worldwide accepted social distancing mandate Zoom meetings and/or presentations become the best channel for your pitch.
It is important to make sure that your business is appropriate for investment. Venture capitalist need to know that it is worth putting their money into because they need to get assurance that they will get their investment back. If there is low-millions ceiling on the revenue that you can generate, they might not see it as a worthwhile expense.
You need to go into the pitch with a positive attitude, go into it knowing that the VC wants to invest, they wouldn’t be hearing your pitch if they didn’t. You just need to produce a compelling argument that is different from what they have already heard so they would partner with you.
When it comes to the actual pitch, you should have a few versions lined up. You should have one for your presentation in front of the investors and the other would be the one you send via email to catch their attention. When you are presenting, you need to be able to hold their attention, which means that your presentation should have minimal words so that your audience isn’t spending their time reading it and rather, they are listening to you vision. There should also be a detailed version that you can use if there is a follow-up discussion.
It is important important to make a solid first impression as well because even if the investor doesn’t want to invest in your company, they may know and be able to introduce you to other investor. Also, go in with a contingency plan. Don’t put all your eggs in one basket and work your way up, pitch to as many investors as possible and start with the ones that you weren’t targeting to begin with. Consider them a trial run and get feedback so that you are more prepared when you meet with the VCs you are really targeting.
During the pitch
It is very important for you to show that you have done your research and you are able to convey that you are a company worth investing in. You need to remember that you are not only pitching your business, but you are pitching yourself.
You need to communicate how you are different from your competitors and that you are able to stick with your business through its ups and downs. You need to show that you have enthusiasm and passion for the business because if you don’t show that you are committed and passionate, they will see no reason to support you.
When you go into it, don’t ask for a investment that is absurdly high, you need to be realistic and self-aware because it can be hard to prove that you are worth such a high amount of money.
After the pitch
Once you are done with your pitch, the investors are going to have questions. So, make sure that you have the appropriate response and figure out how to can address the question and fill in gaps that you might have had in your pitch.
It is also good to end your pitch with a thank-you note and an obvious action plan. Propose concrete next steps for them and reinforce what you are asking for and if they are on the fence, create FOMO. No matter what, people are always wanting to “Keep up with the Joneses” so when you are done, ask them whether there are other people that the investors could introduce you to. It would make them truly think and act quickly.
On the same line as FOMO, once you have received an offer from one VC, do not hesitate to let all the other potentials know. That way they are will give you a response right away. But, important thing is. Do not be arrogant about it, if you act too arrogant, they can come around and respond by saying “Well, if you have another offer why don’t you take that one?”
At the end of the day, it is important to be smart and prepared for whatever response you may get. Do not get discouraged if things do not go how you plan because you just have to keep trying.
An Angel Investor can be defined as an individual with a substantial net worth who supplies financial backing to entrepreneurs,startups etc usually in exchange for a stake of ownership in the company. They typically carry many names;seed investor, private investor but with this type of investment it is very common to find seed investors in family or friends. The investment can come as a one time payment; money which is used to get the company off the ground or it may be the investment is as a backstop for failure with somewhat times injections to boost the business.
Since seed investors may reach into their own pockets for the funds or may represent limited liability firms interests (which would be the source of their funds) a business, a trust or an investment fund, among many other kinds of vehicles, they often demand a high stipend for their investment. While seemingly cheaper options or bargains may be found with banks or money lenders where,it is significantly more difficult to fit the kind of person banks prefer to lend money to money lenders and banks will find a way to get their money back(repossession,court cases etc),whereas,when a business fails the angel investors simply loses his/her investment.
Where to find or how to attract angel investors?
Although it is not the law that a person needs to be one who has “Accredited Investor”status, according to the American Securities and Exchange Commission (SEC) is profiled as an individual with a starting (minimum) net worth of 1 million is assets or more(not including personal homes), or having earned USD$200k in income for the previous two years, or having a combined income of USD$300k for married couple.
There are typically four places:
- Family or friends
- Angel groups or networks
- Angel investor events
- Online platforms
Friends and family
No one enjoys going to family asking them for some money for a business and explaining your dreams to them; family sometimes know how to bring you down but there is a reason they say “charity begins at home”. As we have said before family and friends are most commonly the majority investors in startups(angel investors that is)plus they provide the initial push in the product life cycle.
Angel groups or networks
These are formerly groups of usually at least 10 angels who coordinate together the sourcing, due diligence and portfolio management. Comparably they vary in their levels of professionalism as some use tech syndicate platforms. With these you can’t contact an angel investor network directly to pitch them an idea but unless you are extremely sure of the idea this is not recommended. Try contacting the lead angel before getting access..there surely will be a screening process because they obviously get bombarded with emails, pitches, and proposals. Do some research,extensive homework and aim to make a warm connection, even when approaching an angel group or network.This may actually be the best option with this approach.
Here are a few examples noteworthy of investigating
- Biszangel network
- Angel Investor Network
- UK Business Angels Association
- Angel Investment Network | UK Business Angels Association (UKBAA)
- India Angel Network
- 24 Haymarket — a group of senior business leaders from FTSE100 companies.
- Allbright — for female entrepreneurs — they have quarterly pitch meetings.
- Angel Academe — for businesses with one female founder, and B2B focussed. Investors in LinkedIn for Creatives, The Dots. You can apply online to their pitching sessions here. They tend to do slightly later stage (post-product and revenue) businesses, specialising in health-tech, AI/machine learning, data analytics, fintech, cybersecurity or edtech.
- Astia Angels — US & UK network for female-led businesses. Members have invested over $20 million into 55 companies via 85 investments. They are based in Silicon Valley, New York and London.
- Cambridge Angels — experienced group of deep tech & enterprise leaning angels based in Cambridge. They typically look for businesses with less than a £2m pre-money valuation. Apply online here.
- LBA — London Business Angels, now part of the Newable group of funds. For companies raising between £150k-£2m. B2B preferred.
- Portfolio Ventures — for companies raising £500k+ and entering growth stage.
- Rising Tide — European angel network focussed on increasing women’s participation in angel investing.
- Syndicate Room — like Angellist, this is a syndication platform for angel investors
- Venture Founders — like Angellist, this is a syndication platform for angel investors.
- Wild Blue Cohort — West London based angel syndicate
Angel Investor Events
These happen all over the world and are a great opportunity to expose yourself to different range and variety of angel investors. Now even during the current Covid-19 global epidemic people are still able to attend Angel Investor Events online via platforms like Zoom business conferencing or Skype. An quick search in your browser should yield results of local angel investor events.
Pro’s and Cons of Angel Investors
As we know there are different types of angel Investors and advantages associated with each single entity or individuals:
Angel investors who run things without a network as an individuals usually are those capable of producing large investments (between ~USD 61700-300700).
Here are some examples of typical potential angel individual investors: founders of LoveFilm, Gumtree, Zoopla, Lastminute.com, Skype, MoneySupermarket, Mr&Mrs Smith and Indeed.com are active angel investors in early stage tech companies in Europe.
Payout: approximately US$12.365 000-309000. Average: US$30900k.
The investment process varies most likely they move quicker than a fund (i.e less than three months to make a seed investment). At times a phone-call can yield a result, but more often it will be several meetings with your investment presentation (or deck) and some focussed due diligence.
The post-investment support also varies depending on the individual, but usually they are well-connected and knowledgeable so may help with intros & strategic input. However,since there is much to decide and many commitments they might be onboard with they may not be able to focus many resources on your company, or directly relevant experience that you want, so lay out the expectations clearly of the deal and make sure you iron out the details on their part.
Pros: the experience of a successful business person can provide motivation in your company and healthy accountability or challenge. Some may also have connections to other source pools like VC funds and may be able to contribute.
Cons: individuals work alone so one doesn’t necessarily mean it will bring another. They may not be interested in the extra work and just expect to act as a silent partner even after their commitment citing their chunk of money as contribution enough. Do your research thoroughly and find the right fit for you.
Equity crowdfunding is raising capital from a crowd, that is, people aka the crowd invest through the sale of securities (shares, convertible note, debt, revenue share, and more) in a early stage unlisted pr private company (that is not listed on stock exchanges) A shareholder becomes part owner of the company and might potentially profit if the company does well and if the company fails the opposite is true…their investment is gone in the wind. The democratizing of wealth through the emergence of Equity crowdfunding platforms has opened up so many possibilities to the public or crowd.
Pros of Equity Crowdfunding
- In some countries(dependent on your location) some tax incentives are offered to offset the risk involved with investment in early-stage companies. The UK offers 30-50% income tax relief.
- Equity crowdfunding provides access to capital which fuels enterprise and encourages commerce
- As a pool of investors it minimizes risk as compared to investment as an angel investor
- Collects a list of investors and connections for future progression
- Can be like a marketing tool that builds networks and flushes your platform with organic visitors
- A successful equity crowdfunding campaign can act as proof or vaible credibility for approaching angel investors in the future.
- Gives a good vantage point from which to progress with presales of your product.
- Equity crowdfunding is comparably less complicated than other forms of investment.
- A excellent executed Equity crowdfunding campaign draws in free media exposure for your products.
- The cusp of equity crowdfunding campaigns provides what banks are not willing to, taking care of a section of the community that cannot access funds for their businesses otherwise.
- As some platforms need very few checks to register as an investor, others require more . So self-certification becomes the method in which those who seek funding qualify themselves to investment platforms by which one gains experience, risk awareness and skill to accommodate a startup.
Cons of Equity Crowdfunding
- Equity crowdfunding by nature is risky, so there are a number of things you need to be aware of if you’re considering investing.
- It can take years to see a return
- Equity crowdfunding may not be ideal if you are in need of a quick return on investment; your shares may take a while to increase in value and conversely impacts the potential of getting a hefty return upon sale
- Dividends in most cases are not a viable perk because normal startups don’t make enough profit to pay a dividend.
- Illiquidity is a typical trait of a crowdfunding investment so it limits the possibility of taking advantage of other opportunities you may find elsewhere.
- Most likely you will have to hold on to shares until the company floats on an exchange or exits
- Usually startups will need to raise e funds on a later date so new shares will be issued which will almost certainly dilute the value of your shares(percentage will be reduced)
- If you don’t have preferential rights type of shares then those who do will work to your disadvantage.
Here is a list of the most common Equity crowdfunding platforms around the world;
Kickstarter is an international equity funding platform for creative projects where each project creator sets their project’s funding goal and deadline and if the public favour the project, they can pledge money to make it happen. If the project succeeds in reaching its funding goal, all backers’ credit cards are charged when time expires.The Kickstarter platform utilizes an all-or-nothing funding approach, so those projects that reach their goal then receive funding. This concept allows backers and potential investors some form of comfort that an idea or project will surely be completed as projected and minimizes the risk for the creator.
GoFundMe is a for-profit company that provides personal crowdfunding options designed to help financial burdens for families and struggling businesses. Families use it the platform to raise funds for school trips, medical expenses and small to medium businesses use GoFundMe to cover large expenses from unforseen problems like robbery or fire.It is not uncommon for people to find sponsors on the platform for such things like birthdays or honeymoons! It charges a 2.9 percent payment-processing fee on each donation, along with 30 cents for every donation. The company asks donors to leave a tip after making a donation.
Indiegogo is a crowdfunding site that provides a service alowing people to solicit funds on their platform for an idea, charity, or start-up business. Indiegogo charges a 5% fee on contributions. Like GoFundMe, Indiegogo launched Indiegogo Life, a service that allows for people to raise money for emergencies, medical expenses, celebrations, or other life events.
AngelList is comparably one of the oldest and most established equity crowdfunding platforms having been formed back in 2010. AngelList operates a high-end job board that connects developers, engineers, marketers, medical professionals, and other talented job-seekers with early-stage companies looking for help. You don’t need to register as an investor to use AngelList’s job board
CircleUp is an vibrant equity crowdfunding platform that links investors with consumer-facing startups, mostly in the technology, fitness, and food and beverage sectors.CircleUp listed companies set the minimum investment amount – typically $1,000, although it can also go as low as $250 or $500
Fundable is another crowdfunding platform that offers rewards-based crowdfunding, along with equity crowdfunding. For companies interested the platform promises hands-on help with onsite profile building, pitch construction, and even business plan development. Fundable’s basic company profiles are available to all but registered users are able to request a prospectus and make non-binding funding pledges through the Fundable platform. That said,, Fundable will not be responsible for brokering direct investments so to get an audience you must contact potential investment targets directly, and all money and shares actually change hands away from the platform. Unless otherwise noted, the minimum investment amount is $1,000.
Crowdfunders is crowdfunding platform that focuses mainly on innovative consumer products, consumables, and social/nontraditional niches (such as green energy startups and African real estate funds). Investors are allowed to make non-binding funding pledges like a future promise to pay via the Crowdfunders platform while the actual monetary transactions occur away from the off-site. It is not a necessity but transactions do not start until the preempted minimum target is reached and the platform does not carry a minimum investment cap although the average investment rarely goes below US$1000.
EquityNet is another crowdfunding entity that claims the title of the original equity crowdfunding platform having found it’s origins in 2005 plus claiming to have the only patent for the concept of crowdfunding. It’s features are similar to Crowdfunders in that it mainly focusses on consumer products and social enterprises but EquityNet’s apparent niche carries on to attracting single-asset projects, such as assisted-living facilities and medical clinics, in contrast with traditional o product-based startups or multi-asset funds. The company also holds an affinity with “smart” glass coatings,– enterprise-grade SaaS security solutions, next-generation lithium-ion batteries, high-tech B2B concepts etc. Their platform does not hold a minimum investment prerequisite but investments rarely bellow below US$1000 while research shows that the average investment reaches 5,000 to $25,000. Convertible debt offerings, or debt issues that can be exchanged for equity at some point in the future, are featured too.
This is platform that emerged to provide for investment in to 10 to 15 early-stage companies to individual startups in the biotech, green energy, insurance, logistics, retail, and packaged food segments. The co-founders proudly tout their involvement in a debate that eventually brought the JOBS Act plus the legislation promoting crowdfunding friendly environment. Eir minimum investment threshold is US$100
SeedInvest is a more professional platform that specializes in “highly vetted investment opportunities.” The platform claims to accept just 1% of applicant companies and keeps it’s books,details and profiles away from the public eye. But registered investors are said to have open access to a wealth of descriptive and financial detail about each listed entity, plus direct access to founders or executives. There is no minimum investment to speak of and average investment.
Just to recap the tenants of typical equity crowdfunding pitch:
- Businesses willing to give up a % of ownership
- Businesses with a great business pitch
- Businesses that can produce 5X or more return.
realizing that there is no sure way of doing anything is kind of a release; it keeps you fluid and ready to learn and adapt to changes enabling whatever helps you succeed. This article serves as a sort of update to the current business environment while still incorporating the tried,tested and proven formulas to successfully raising capital be it via venture capitalists, friends and family/angel investors and equity crowdfunding. Equipped with this knowledge the next steps should be easier for you.