Be it the three F’s (Friends Family & Fools), Grants, Loans, Business Angel Investment and / or Venture Capital the vast majority of startups will need some form of capital to grow. What type of capital you need often depends on what your business does, what stage of growth it’s in and what industry space your company is in.
Which brings us to the point of this article. While it may seem obvious to many, entrepreneurs when faced with the need for Angel or Venture Capital will more often than not seek this anywhere they can find. Meaning, it’s not uncommon to see a business plan for a promising clean tech startup winding up in the bins of Business Angel networks and Venture Capital firms.
This happens predominantly due to two factors.
One. Entrepreneurs send their B-Plans (or we should say executive summaries because you never want to send a 25+ page business plan to a potential investor) to anyone and everyone whose address they can find.
This practice is detrimental for a few reasons.
First. Approaching all BA’s and VC’s in this manner will create negative buzz within the industry. In more mature markets investors speak with one another and a company who has presented everywhere will look amateurish, and this by itself will hinder the possibility of any future investment.
Secondly, this shows that you have not taken the time to conduct due diligence on those people who you want to become eventual business partners in your project. Meaning, if you care so little about who you have invest in your business, why would they take the time to conduct due diligence on you and your company and waste valuable resources that could be applied to a project which will fit their portfolio.
Two. Which leads us to the second point. Do your due diligence. Study the BA networks, he VC’s that actively invest in your industry. Identify what stage in the lifecycle their funds (that apply to you) are in.
This is exceptionally important, because if a fund is nearly exhausted the investor by taking you into their portfolio will not have any contingency capital in the event things go sour.
And most importantly try to get a hold of the management / entrepreneurs that these BA’s and VC’s have invested in to ask how the process when, whether the investor was fair, how they work with the company that has been invested in and /or / if they offer any assistance in terms of strategy.
In closing, you’re offering the investor a product, as they are offering you their services, it’s a two way street and due diligence needs to be conducted by both parties. Not only will this lead to increased synergies between you and the investor, but create a positive working relationship that in all likelihood will also increase your start-ups chances of success.
There is good news for start-ups this Monday. Index Ventures, a EU based firm has launched a new fund focusing on early stage deals, and plans to invest in twenty companies over the coming 24 months. Aside from the positive indicator that money is being raised in order to invest in new companies and that we’re seeing signs of life from the VC sector, what really differentiates this move by Index Ventures is its strong focus on the startup, and it’s approach to investment in them.
What this means is that the partners of the firm will take an active stake in the start-ups by joining their boards, this is a shift away from the status-quo of larger firms whose partners typically don’t engage the startup team due to time constraints or otherwise.
Index Ventures new seed fund is exactly what needs to happen in the VC industry. VC’s need to take a more hands on approach in their invested firms to ensure a greater success to failure ratio, and at the same time, they need to fill the gap in early stage capital that is lacking in many European markets. Some of Index Ventures prior investments are MySQL, Skype, Playfish and RightScale.
In more financing news, the Guaridan has reported that Luke Johnson, the man who brought Pizza Express to market in the 1990’s has acquired a 27{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} stake in the Beer & Partners angel investment network.
As a whole, good indicators, and again it seems that those who will lead the world out of its current slump will once again be entrepreneurs.
Who pays the fees, should it be the startup? Most Investors will tell you yes. Or should it be the Investor, which most startups will simply expect. The story is however that is depends on a number of factors.
What are hose factors and how do you know who, when, how, why, what, where, and huh? Well that’s why we’re here to help navigate some of the murkier waters of your startupedness. With that, first thing’s first. You need a solicitor (attorney, lawyer), someone you can trust and who knows the corporate side of things, remember each country’s laws are different so if your an S.A. don’t get a lawyer do deals with Ltd.’s. In terms of getting one, network, network, and then network some more.
Now that you’ve got a solicitor, you can go and start talking about financing. If you were introduced to a BA by someone, chances are they’ll want a finders fee, this can range anywhere from 3% – 10% of deal size, and in some extreme examples has even hit 15%, mostly the % will be a +/- 1% of the market you’re in. Spain averages on the lower side of the spectrum, whereas the UK is on the higher side of it.
Aside from this you’ll have legal fees – issuance of new shares, dilution of your own, and even if you do have an MBA, all this will undoubtedly still be confusing at the onset, add to that a finders fee for a facilitation intermediary if there is one, hourly solicitor rates, administrative expenses, filing expenses, etc… etc… and with a seed investment of say €100.000, those bills can quickly add up to 10-20% of the total investment, and all of a sudden your 100k that was supposed to take your co. international looks like it just might flop on its bottom.
So who pays the fees? At the end of the whole fiasco it’s both of you. If the startup pays from invested capital, it’s really getting a fraction of that invested capital, and if an angel pays then that angel is throwing that money away ontop of the investment. Likewise, if the money comes out of company coffers it’s pretty silly as that cash is inherently dedicated towards operational expenses. In which case if you’re lucky enough to find yourself with a willing investor, we recommend the following.
When dealing with an angel be up front about the fees and additional costs, if you need 100k to get to operational business level 2, find out before hand what fees and additional costs will come into play.
Now, say you do need that investment of 100k into your company to bring it to the next level, fees will be 10% meaning a total 110k for the cash transaction. That 10k will go to lawyers, administrative expenses, what have you, and is a sunk cost, no ends or buts about it. But aside from the lawyers who can benefit from it? The truth is the investor more so than the startup. Why? Because many nations in the EU, (mind you not all, so be sure to look at your local laws) – offer a tax shield for business angels. Meaning, that if I as a business angel invest 100k into company X, I can write of 10-20-30% of that investment off of my taxes for the year of investment, additionally, if the company fails, I may be able to write off an additional say 20%, thus decreasing my risk and making my investment contribution a fraction of the actual sum.
In which case, if you can write off that 10% in year one per se, the investment on behalf of the angel would really be 99k instead of the equity for cash injection of 110k. That shield does not apply to the startup, and your law / admin fees will go on your books as just that, the are not depreciable, the are sunk costs that eat up your cash.
So the next time you find yourself at a round table with a few BA’s or are a BA yourself, just remember that there are numerous things you can do to lower your risk in any new venture. It’s not just about investing, it’s about doing it in an intelligent manner.
One thing about providing a good service to all our readers is to try and provide it on an almost continuous basis, and while we do talk about starups, entrepreneurship, best practices, capital and a whole array of other topics relating to new and small enterprises – we figured, if most entrepreneurs are working six days a week, so should we, after all, we don’t want to be called hypocrites here at F3FundIt.
So we got to thinking, Saturday should be a time to at least wind down a bit, and what better way to wind down than to each Saturday feature a new promising startup. Now this being week zero of this feature series we figured we might as well give you a general guideline on what to send us in order to qualify for … wait for it….
Startup Saturdays…
Just send an e-mail to info@f3fundit.com with the subject line “Startup Satuday Submission” or “S3” with the following information.
: Satrtup Name – : Website – : Industry – : Where are you located? – : What exactly do you do? In one sentence please. – : How did you come up with the idea? – : What stage of the startup process are you currently in? – : Any milestones we should tell the world about? : How about your team? Who are they? – : Any fears, phobias, anxieties? – : Any advice to pass onto new budding entrepreners? – : Anything you want to add? –
Groovy, that ought to cover it. And when you do submit your startup, it’d be killer if you could provide a logo that we could throw up and if you have a video or any other media, well… you can submit that as well.
You’ve been working for days on end, the business plan is more or less finished, you’ve started developing your product, and still putting some polish onto the conceptual side of things. You figure you can get the basics up and running, or simply put you’re at a wall, and the best way and only way to get over it is cash. You’re now officially seeking or looking for investment.
