How to get an iconic Idea funded
In this post I'm going to look at the various sources of funding
for iconic ideas. There are basically three sources of funds for
iconic ideas (given that anything iconic and early stage is likely
to frighten the horses in conventional lenders like banks.) The
sources are smart investors, friends, family and other amateur
investors (sometimes known as friends and fools in the industry
given how often they lose money) and crowd funding.
Smart
Investors
Smart investors are professionals like VCs or experienced angel
investors - often part of angel networks. They buy after taking a
rational view of the business prospects and a subjective view of
the commitment/enthusiasm of the people concerned.
Around 40% of the investments which professionals make get
reasonable returns. Angels do less well.
VCs that will invest in early stage companies (ie pre £1m pa in
revenues) usually like to see between £1m and £3m being put to work
as an initial investment.
A dwindling but very smart few will make seed investments of
between £50k- £250k
Amounts above £1.5 m are often split between 2 VCs. All VCs have
sectors they focus on - look at the British Venture Capital
Association website (search for BVCA) for links to individual VC
websites where these are spelt out. Almost all VCs want to see
something unique or at least special about the technology being
employed in the business, even if it is not a pure tech business.
Hot sectors at the moment are data analytics, Internet retailing,
medical technology, and mobile data/services. VCs always have one
eye on the exit ie they ask themselves: who will buy this company
in 5-7 years, if it's not big enough for a floatation on the stock
market ?(and few do get that big)
A typical individual angel investment would be £25k to £50k,
although I've occasionally seen people invest £250k. Angel networks
can usually raise £200k-£300k as an initial investment (the most
I've ever seen is £1m). Angels tend to be less prescriptive about
what they will invest in as long as it looks like a good
business.
Friends , family and
others like that
Other investors include friends and family, inexperienced
angels, hobbyists etc. They tend to invest based on a subjective
view of the opportunity and/or a desire to help/get involved. They
usually ignore or are unaware of the challenges of turning a great
idea or a great small business into something which generates value
for shareholders. Their investments are something of a lottery -
mostly they don't work out - less than one in a hundred might.
These type of people invest because they already have or they build
an emotional attachment to you. All human beings are skilled at
getting what they want from people who have an emotional attachment
to them so you don't need any advice from me here!
Crowd
Funding
It's very early in the life cycle of this funding mechanism so
it's hard to say much. Early indications are that most decisions
are made totally subjectively and the gamble here is that the
concepts on which crowd funding are built ie wisdom of crowds,
online education and social capital will be game changers in terms
of investment returns. Sometimes companies seeking crowd funding
provide gifts (Like one of the first products built ) to investors
in return for cash instead of equity or debt and this seems a
win:win to me. Crowd funding pitches tend to be 3-5 mins on video
.
FAQ
Why do smart investors
invest at all given the odds?
VCs only invest in potential big winners. Statistically it's
very likely they'll get at least 1 and probably 2 big winners out
of each 10 investments they make. 1 out of 10 gives a totally
acceptable portfolio return as long as only 4 out of 10 fail
completely
Angels rarely have big wins (but some do and there is always
hope of a jackpot). Their returns are leveraged up by
generous tax breaks without which they (on the whole) wouldn't make
enough money to be interesting.
Why do most businesses
good enough to attract funding fail?
What normally happens is:
- during implementation the proposition gets diluted either
because of implementation difficulties or competitive action or
both, putting pressure on sales numbers and product pricing.
Sometimes the timescales for building key features of the business
stretch out longer than expected
- So it takes longer than expected to build to critical mass
- So the company needs more cash than originally anticipated -
whether it gets it or not depends on who its investors are, the
state of the market and the skill and resilience of the
management
- Sometimes management falls out and chaos results
- Sometimes management gets discouraged and gives up too soon
(very common)
Why do VCs do better
than Angels?
- They get the pick of the potential big winners
- Their businesses are better capitalized initially making them
much more resilient to unexpected problems and VCs will normally
provide further funding if necessary
- VCs leverage up the returns of successful companies by use of
venture debt (not normally available to angels)
- VCs provide a lot of practical help to management
- VCs are expert at finding and managing exits
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