The Goldilocks approach to funding
Email a Friend
Too much funding, too little funding. Ahhh…. just the right amount of funding
If I had £1 for every time I have seen a company attempting to raise too much money, I could give up on trying to be a successful business angel.
Occasionally you see a company not raising enough, but many of the companies that approach Envestors are trying to raise too much money for the stage of the business.
For first time entrepreneurs, I think this stems from a lack of understanding about how venture capital funding works. These first timers see VC as a cloud of financial resource they can connect to (to put it into a contemporary analogy), and if they manage to tick all the right boxes, the green light comes on and they will be allowed to download the money they need.
But they forget the money they are taking has a price attached which is connected to the perceived risk of business, and this risk in a high growth company changes very quickly. If your turnover is less than a few £100,000 per annum, it’s a tough call to be raising more than £1m because a) it’s a lot of money and b) by time you have spent half that amount, the risks (hopefully) attached to your business have probably changed dramatically.
Entrepreneurs need to recognise the difference between risk capital (cash needed when there is still a significant chance of it being lost because the technology doesn’t work, the market doesn’t work, the price doesn’t work, the management doesn’t work) and growth capital (money needed when most of the business model is validated, and there is therefore significantly less chance of the capital being lost).
For small scale VC, the amount you are trying to raise will also have a serious consequence on the post-money valuation of the business. Raising £1 million for a pre-revenue or very early stage business instantly pushes valuations towards unrealistic £2 million mark as founders don’t want a minority stake from outset any more than investors want to have control from the outset.
So even if your longer term funding requirements are likely to total £1 million, it's worth thinking how you can tranche your funding requirements into amounts that reflect the different stages of risk in the business, and raise further amounts once you have reached some demonstrable sales / product / customer milestones.
Overall the recommendation would be to i) wait until absolutely the last moment you can before raising finance (ie get as far down the track as you can), ii) don’t look to raise all your funding requirement in one go at the beginning.