When should I think about investment?

Money, money, money! That’s what this first March edition is about.

I was speaking with investors at a recent investor dinner, and in our discussions, we talked about investment readiness in the founders' journey.

External finance is an appealing to any student founder; big raises can attract PR, buzz, and even more interest from investors. (Cue the FOMO.) And, there are quite a few investment readiness programmes at accelerators, incubators, and even universities to support startup founders.

But when it comes to understanding when, where, and how much capital you need, it is both an art of a science. I share this in the Everyday Entrepreneurship podcast, but I wanted to break it down further as we are creeping closer to the end of the UK financial year.

What’s the motivation for external capital?

Firstly, let’s backtrack for a hot second.

Before we even get into the mechanics of external finance, investment, or grants, let’s think about the motivation you have to raise finance. Is this something you want, the business needs, or what others are pressuring you to do?

Raising money or searching for grants, awards, or loans take time, energy, and effort. So if you and your team are not on the same page, then I encourage you to have a genuine conversation first and a moment of self reflection.

Now, let’s jump into the scenarios that do and don’t make sense for external finance.

Understand the cenarios when it makes sense to raise capital.

In the podcast, I discuss the common themes I see when founders would (potentially) be interested or at the right stage to take external finance. I break them down in a few buckets (which, caveat, are not hard-and-fast rules because every business is different!), but I wanted to share below:

• Starting a Capital intensive Venture

  • These are ventures that will always need upfront investment because of set up costs or high R&D costs. Think about ventures focusing on biofuels, cancer technologies, deeptech, etc.

• Solving a Problem Money can Solve

  • This sounds weird, but there are problems that money can solve. You may have a potential Chief Scientific Officer lined up, but right now are not able to offer them any salary (even though you know their insights could change the game!). This is a problem that can potentially be solved with a cash injection.

• Gaining a Voltage Effect

  • Momentum is like a magnet. If you have a business, product, or service that is working but need to reach a new audience, or fast-track adoption, then money can help you create these voltage effects. (Take a read of this book if you have not heard of voltage factors.)

Check out the flowchart to see how I mentally map these when I chat with a founder:

Know when NOT to take external finance.

It is is just as important to understand when NOT to take finance. There are many times where founders jump into the fundraising process too early.

Raising a round takes time away from the running of the business. (It is a job on top of your job!) And, if you are not ready or well positioned as a business or with your investment strategy, then the process can take even more time and be even more painful.

If you are seeking to raise, you will want to do it right the first time.

(Just an FYI, I will do another edition on the types of investment in due course because let me tell you, VC is not for everybody!)

Look at all forms of finance.

Equity finance is the one most often people think of when it comes to external finance. But, there are other forms of finance like debt financing, grants, even competitions, that could be a better fit given your needs.

For example, if you are having a cashflow issue, such as you need to order 1,000 units but do not have the liquid cash on hand, and know you will sell them or presell them, then perhaps a small founder loan makes sense.

Potentially, you may be able to gain cutting edge grants or research support to help you de-risk your technology or R&D. These are especially useful for some of the tech founders out there.

Or if you are having creating a huge social impact enterprise, there may be a good competition or impact grant/award that suits your need.

As a founder, I encourage everyone to understand all their options before deciding on one.

Don’t be afraid to ask for advice.

If you are having these questions fluttering around, do not hesitate to reach out to a business advisor, mentor, coach, or even fellow founder. They will be able to discuss your options with you, or in the case with a founder a few steps ahead, share the ‘real take’ of what it is like closing a raise or getting audited by a grant provider.

And, lastly, if there is anything I can do to help, do not hesitate to reach out.

Have a question like this one? Submit your own QoD here to have it answered in a subsequent edition! I try to make this as relevant and applicable for founders like you.

If this has been useful to you or if you have feedback to improve, please drop me a quick line. Or share with a friend!