A member of the Club Workspace team was once again in situ as Startup Britain’s Finance Week swept into its second day. We attended the 'Access to Finance' event that took place in the impressive Burson Marsteller offices at Central St. Giles, and left with a barrel-load of info about startup funding.
Crowdfunding and VC Funding were the topics of the day at 'Access to Finance'. Experts from both fields shared their advice with the audience during two expert panel sessions. The first panel was made up of five market-leaders from the crowdfunding scene, and the second was composed of three Venture Capitalists. Questions flowed thick and fast from the audience that was choc-a-bloc with startups, entrepreneurs and SMEs.
For those who aren’t aware, crowdfunding enables startups to secure funding by advertising their idea to an online community of crowdfunders. These online investors are invited to contribute as much money as they want towards the startup’s overall target.
Crowdfunding comes in two flavours. One type of crowdfunding is reward based. Reward based crowdfunding involves startups giving away a product or a gift in return for investment. The other form of crowdfunding is equity based. Much like securing VC or Angel capital, the investor receives a share of the company in return for their investment.
Luke Lang was the first of five crowdfunding speakers to introduce themselves. Luke is a co-founder of Crowdcube. Crowdcube are a crowdfunding platform that impose strict barriers for entry. Crowdcube insist that investment-seekers must first pass rigorous checks.
Amanda Boyle of Bloom VC is at the other end of the scale. Bloom doesn’t predicate any complex barriers to entry. The only thing that potential crowdfundees need to prove is that they are a real person. Thereafter it is up to them to prove their worth to the crowdfunding community.
Paul Higgins of Grow VC explained that part of his organisation enables people to build their own crowdfunding platforms. The service provides the required web infrastructure and back-end behind a successful crowdfunding platform.
Jeff Lyn is part of the Seedrs team. Seedrs is a crowdfunding platform that allows investors to make equity investments in startups. Jeff also proved to be an enigmatic speaker with a touch of Eric Ries’ lean-startupism about him.
The first big question to arise was, 'what’s better: reward based crowdfunding or equity based?' The answer was that both forms of crowdfunding work, but each type is prefered by different people.
The reward based platform is great if you’re an investor who is willing to invest in exchange for a reward and the afterglow of being quasi-charitable. On the other hand, the argument for equity based went thusly: no-one wants to give money to the next Zuckerberg in exchange for a kitschy mug. Investors want the money!
The next question asked whether crowdfunding was a genuine alternative to VC or Angel funding? There were two answers. It certainly can be an alternative, if a startup can ascertain all the funding that it requires by utilising a crowdfunding community, then so be it.
It was also argued, however, that startups could use both crowdfunding and VC capital. A startup could use crowdfunding to ascertain funding at a far earlier stage than either Angels or VCs could manage. A startup could secure a 'first round' of funding on a crowdfunding site and then could graduate to VC or Angel funding for their second round. This approach would enable startups to grow far quicker than ever before. In the words of Jeff Lynch: "VCs are only able to invest in a business, crowdfunding investors will invest in an idea."
Amanda Boyle made a great point about product testing. Crowdfunding provides a perfect opportunity for startups who would like to crowdsource information about their product. If a startup releases a product that is at prototype level to a crowdfunding community and it receives a hundredweight of positive feedback and investment requests, they can swagger into a VC’s den with a bounty of market-research behind them.
A great question came in from the audience: is it wise to crowdfund if you have IP that is essential to your startup? The short answer was: no. If your IP is the epicentre of your project and you genuinely wouldn’t feel comfortable disclosing it, then crowdfunding may not be for you. However, if you can manage to write a crowdfunding pitch that hinted at your project’s usefulness whilst maintaining the chastity of your IP, then go right ahead!
Most crowdfunding platforms charge between 5-8% on the amount of investment raised. Others also charge a similar percentage on the money that is gained by investors. We’ll let you check the individual websites for accurate figures.
Venture Capital Funding
After a short coffee break, the next panel was go.
The VC panel was made up of three distinguished figures from the Venture Capital scene. Alliott Cole is a man who we’ve met before at Club Workspace. He shared his expertise at our SEIS Adivce Event, which was cohosted with Dreamstake. It was great to see him again. Alliott appeared on behalf of Octopus Investments. Octopus invest between £100k and £5m in companies and look to recoup 15x their initial investment. Octopus have invested in Love Film, Zoopla and GymBox.
Mattias Ljungman is part of the team at Atomico Ventures. Atomico were started by the creator of Skype. They prefer to invest in high-growth startups who are looking to break into world markets. In the past, Atomico have funded Last FM & Angry Birds.
David Bagley spoke on behalf of both Venture Hothouse and Startup Yorkshire. Venture Hothouse readies startups for their investment rounds. Startup Yorkshire make VC investments of a value between £50k and £2m.
The first nugget of advice that was provided by the VCs was to do with a startup’s debut on the investment scene.
Mattias advised that it is a necessity for startups to research their investors. There are a myriad of VCs out there, and they are not all cut from the same cloth. Every VC looks for different things! For example, Alliott prefers to invest in British companies as it’s easier to keeps tabs on an organisation who are down the road in London, for example. Mattias, on the other hand, doesn’t mind if your base is in Buenos Aires. If startups go into a pitch with a good knowledge of their Angel’s idiosyncrasies, this will not only look good, but it will save your time and theirs by eliminating potential incompatibilities.
Many members of the StartUp Britain audience wanted to find out what makes a startup investible.
David Bagley insists on a well thought through business-plan. When the time comes for David to read your plan, it needs to be watertight. There may be more that he wants to know after he reads your document, but there must not be any holes in what you give him.
Mattias wants to see progress. You could have the best 'idea' since Facebook, but if you can’t show him progress and traction since your inception, than it will be a very hard deal to make.
Alliott likes big numbers - and that doesn’t mean money! If you can prove that you have impressive user volume, then this is great news for a VC.
The VCs agreed that they usually take an equity share of around 25%. VCs need a worthwhile stake, however they don’t want to take too much. If they were to ask for a 60% share, for example, Alliot explained that this would deincentivise the startup’s team and therefore hinder the progress that the investor would like to see.
The number of 25% is very flexible. Sometimes the startups can hold the whip hand. If there are several VC groups fighting for a startup, the figure can go down to around 15%. However, if there is more risk involved and no competition for the startup in question, the share can rise to around 35%.
Here are some tips from Alliott about how to conduct yourself during your VC pitch.
Number one: Do not be late! This isn’t due to manners or politeness, but a VC’s diary is completely rammed. If you spurn any precious minutes, you won’t get them back.
Number two: When you arrive, do not sit in the reception and wait to be invited in. Get into the pitch-room, set-up, and own the space.
Number three: Treat your VC like a customer. This is the biggest sale you’ll ever make!
Number four: Keep your presentation to below ten slides.
Mattias added this tip about the first contact that you should make with a VC: No more than one page. Your first email to a VC should be a set of eye-catching and provocative bullet-points. Remember, in this first email, all that you’re trying to persuade your VC to do is invest 30 more minutes in your startup. If you do that, then you’ll be able to pitch for their money at a later date.
One last point that Mattias added was an inherent 'fault' in the character of British startups. He said that startups in the UK are likely to be apologetic and self-depricatory about their shortcomings, whereas Silicon Valley startups are far more likely to laud their abilites. Mattias' advice to UK startups? Celebrate more!
Thanks to the eight experts for their unbeatable advice! Hopefully it helps some startups out their secure their funding. The biggest thanks to the Startup Britian team for hosting such a useful and beneficial event as part of their immense Finance4SUB week!