The Cold Hard Truth About Fundraising for Start-ups – Ch 1

Who is this for

Pitched at first time or early stage start-up founders, this thread will walk you through the process of raising external finance into your company. It assumes that you have a UK listed company with ordinary shares. If you don’t, some of this may not be applicable to you.

It won’t be a super technical thread and should not be a substitute for legal or accountancy advice. If you want that, find somebody excellent and pay them for it. If there are good links to definitive sources, I will try to put them in here for you.

It also assumes that you have a business which is already selling something to somebody or is within six months of doing so. My general experience is that a first-time founder with a “good idea” is going to struggle for a long time get external funding in the United Kingdom – if they get funding at all. The good news is, there will be some checklist below that will help you work out what you need to do, and in what order, to be funded.

It assumes that you have a team with you. Solo entrepreneurs may want to skip ahead to the “free money” section and grow their team before coming back to looking for more substantial investment. It is extremely difficult for anybody to lend money to, or buy shares in, an individual. The risk of that one individual changing their mind or not being available for some misfortune is far too high. Later on, we will explain why teams have such a huge impact on your ability to get investment.

This article is not for people who have “great ideas” and want money to turn them into a business. Nor is this article for people who have been failing to execute on an idea with a small team for a long period of time and to have significant deficits or debts that they are looking to repay. Nor, indeed, is it for a team which has spent all the money it raised in the first round and needs more to proceed. Fundamentally, raising money for business is not about what you want, or need, but about your ability to generate wealth of other people. Grasping that is the first and most important principle of fundraising.

Why would you want to do that?

The legitimate reason for taking an external funding into a company is that you can create more wealth for both the founders and the investors faster with external finance than without. (If you want external funding so you can pay yourself more, repay your own debts, repay your family the money they lent you, or pay off creditors then you are likely to be unlucky. Investors generally don’t want to do that).

If you know for sure that you can generate that wealth, but you find you need property, equipment, a team to scale out something that already works, money for marketing to sell a product that is already slightly successful, or you just need more people to deliver something that customers already want, then – perhaps – you will be successful in raising external finance.

The reasons you have for asking for additional finance will go a long way to helping you work out who to take that money from, and in what way you take it.

First – sell

If you are founder, then it is assumed that you will be a good salesperson. Either selling your ideas, your products, or the opportunity to invest in your company. If you are not a natural salesperson, then you might need help with doing this.

Investment becomes dramatically easier to obtain if you already have revenue. Not necessarily profits. Just revenue. If you have under £1 million of revenue a year, which is most young companies, then you are probably too small to obtain traditional institutional venture capital from a venture capital company.

Your ability to sell is a vital component in the decision of investors to support you. The UK is full of people who think they are “inventors”, but without the ability to build the product and then to sell that invention, all the imagination and creativity in the world is of very little value. Some very smart investors and analysts suggested that the idea is worth 10%, execution 30%, and sales 60% of the value of the company. I’m not tempted to disagree with them.

Above anything else, sales revenue is the very best form of money. It is more than cash – every sale comes packed with understanding of the customer, feedback from users, affirmation of the product and service, and is a solid vote for you and your business. Investors often say that £1 of revenue is of more use than £10 of investment. That’s probably an underestimate.

So, if in doubt: bootstrap and sell, sell, sell.

Second – have a plan

Some small businesses start by accident. Somebody asks for something, the founder delivers it, and they find they have a small business. Other times they see a problem that needs solving, build a solution, and go around and offer it to people. People accept the solution, and the founder finds themselves with a small business and the need to deliver and support something.

If your business started that way, congratulations because you’ve passed many of the hardest hurdles. However, it’s not quite enough on its own. You really do need to have a plan. And that plan needs to be written down. And it needs numbers in it.

If you are sat in a coffee shop with a burning desire to solve a problem but haven’t started yet and know that you need people and money to move forwards, then you need a plan even more than the person who already has a business and some revenue.

There are many excellent online resources for business planning, financial modelling, and forecasting. If you don’t have a written business plan can I suggest that you take a week out and write one? If you only have one day, then sit with a few friends, or other people in the business, and use the Business Model Canvas / Lean Canvas model to sketch out what your business does.

Buy this book https://www.wiley.com/en-gb/Business+Model+Generation%3A+A+Handbook+for+Visionaries%2C+Game+Changers%2C+and+Challengers-p-9780470876411 and read it all. It is great.

(See links for the fine print on Lean Canvas v Business Model Canvas)

As a rule, my advice is to build just one good plan and to use it to run your business as well as to seek investment. Measuring the way in which reality differs from the plan, and understanding what has happened, is an important part of being a founder. Keeping a plan alive, and tracking reality against it, shows a degree of maturity that potential lenders or investors find attractive.

There is a longer section on HOW to build that model coming in this thread.

It is the rest of the plan that we should consider here. Everyone has their own list, but this one is as good as any as guide to the things that need to be in a business plan.

  1. One sentence to sum up your business
  2. Who is trying to do this, and how good are they really?
  3. Why are you doing this?
    1. What problem does your business solve for your customers?
  4. What is the business going to do?
    1. What will you sell?
    2. Who will buy it?
    3. What will you charge?
    4. How will you get paid?
    5. How else will you make money from this project?
  5. How will you sell
    1. How will customers learn about your business?
    2. How can you encourage referrals?
    3. Do you expect to work with partners or alone?
    4. How long will customers stay with you?
  6. How do the processes work – how does it get made or done?
    1. What metrics will tell you that you have succeeded?
    2. How long will things take?
    3. Are there any known obstacles, challenges, or open questions?
  7. How will you deal with competition?
    1. Can you beat them?
    2. Can you dominate a small area or market quickly?
  8. Business model and financial model
    1. Cost to acquire a customer
    2. Cost to service a customer
    3. Customer lifetime value
  9. The ask – how much money do you need, if any, why and what investors get back

Whatever you write, you need to keep it alive. At least once a month. It should be a living, learning part of the business. For that reason, I tend to create them in WIKI software, and give all executives the ability to edit and update it.

There is a longer section on business plans coming later as well.

Third – (nearly) free money

There is no completely free money in the world, unless you trip over a pot of gold in a field. Sometimes grants, government support, prizes, and soft loans are described as “free money” but they all have a significant cost: a substantial amount of time and effort to apply for in proportion to the amount that can be gained, and ongoing requirements for monitoring and reporting which will also take up time and resources.

Having said that, it is my general view that all these things are worth the effort of applying for. Whether or not the money is in fact “free”, the discipline of filling in the application forms and describing your business properly and in some factual detail is an excellent one for any founders. You will learn as much from any rejections as you do from any acceptances.

The sources of this finance vary rapidly, and geographically. It is very hard to provide a complete list of all of them which will stay accurate and relevant for more than two or three months. You could however start looking in these places now, and then ask your peers and other founders for up-to-date information as you go along. (If there is demand, I could try to put up a detailed list that would be relevant on the day that it is posted!)

The benefits of these very early sources of money can be quite large if they are used wisely. They may enable you to build a small team, or prototype a minimum viable product, or market test a design, or do some simple test marketing. They are usually small amounts of money and may not give you the ability to do all those things.

Later, there may be other sources of nearly free money, but, again, all have hurdles and criteria that need to be considered. If you have a business with some substance, you might also look at:

These amounts may be small, but they are a lot easier to get than equity or formal loans and the getting of them helps investors and lenders understand how well you can explain your proposition. It matters that you can get others to help your business. Your ability to convince other people to join you in your enterprise is a critical part of the due diligence that any sensible equity investor will undertake. If you have already persuaded one or two people to back you and are still making progress in the direction that you first set out upon, then you have partially prequalified yourself for later investors. This is very much a double-edged sword, however, because if you go backwards after your first backer comes onboard, then it counts very strongly against you.

Think like an investor

Everything that investors know tells them that they are very unlikely to recoup their investment in an early stage company. The odds are approximately 1 in 4 that they will make back more than their investment on any single company, and only about one in 20 that they will make a return that is a reasonable multiple of their investment. Considering that the average angel or fund loses money on three quarters of the things that they invest in, they absolutely must try to ensure that every investment has the best possible chance to be one of those very rare winners. Not only that, but they must invest in lots of companies and do so quickly; this is because the costs of due diligence and the time taken to invest reduce their return. What this means is that the investors wants to do the minimum Due Diligence as fast as possible in companies that instantly appear to be a brilliant investment opportunity and never, ever, give any negative signals at all.

This is neatly, and graphically explained here –

Sometimes I put it like this: “investors are not looking for 10 reasons in invest in you. They are looking for the first reason to walk away”.

Investors know that in order to achieve success many very unlikely things all must happen successfully and on time, while many likely things that are bad have to not happen.

What factors matter?

I spent a long time looking at the factors that are common to investor decisions and there and there are few things that are common to all investment decisions.

  1. Do you have a really strong IP? – Is it a unique IP, is it protected or at least protectable, and do you own all of it in such a way as to be able to exploit it freely?
  2. Are you in the right place? – Is the company in the right geographical place to take advantage of cluster effects, grants, support, and a readily available workforce? Is the team effectively ‘plugged in’ to that ecosystem? Can you show that in this location you can grow something at least 20x larger than you have today.
  3. Is it the right time? – Is it a ‘rising tide’ market for value? Is there a general market trend that supports growing the business now? Can you see that continuing for at least 5 years? Are all the ‘luck and timing’ factors positive for you?.
  4. Is the team good? – Is at least one member of the team in the top 10% of the regional skill set for this sector? Can the Founders assemble a complete team at an advisory level, executive level, management level, and production level; and will that team have the experience, skills, and drive, to deliver on the idea? Can you create a culture of openness, trust, communication, agility and deep skills? Can you keep them together? Can you remove people who don’t fit? Do the Founders truly know how to make and manage that team.
  5. Is there a compulsion to use? – Sometimes this is called “solving a real problem”. Part of the evidence will come from the original use case, but this is more about identifying the absolute “must have” customer benefit and the pain that you remove. What is it and do you have evidence you are right? Is that evidence as good as being able to prove every part of ‘customers look for what we have, compare us to other solutions, try us, buy us and tell us that what we solved their problems’. Take a deep breath and ask your friends if there is a real need for your product or service in the world.
  6. Is there a compulsion on customers to keep using? – What is it that is going to make your customer keep on coming back? Can you control churn and create loyalty? Can you generate genuine loyalty?
  7. Is there a market? – Is the market big enough? Is the market growing? Not just ‘how many people might want this’, but specifically is there an entry point with a defined customer base, can that entry point be monetised, will customers pay (and how much), and is there a route to a commercial scale? Is your addressable market at least £1bn in gross revenues, or 20 times larger than you think your company will be in 3 years’ time?
  8. What competition is there – How big, where, & how close are your competitors? What prices and what products challenge you? Can you explain it all? How you will beat them? Can you genuinely beat your 5 nearest competitors sufficiently fast to protect a profitable business for 5 years? (If the sector has a dominant company who is already at least 10x larger than you might want to reconsider the sector you’ve chosen to enter!)
  9. Are you measuring the right things? – What numbers or KPI matter to you? The numbers you chose say a lot about where the company will go. Are they well evidenced? Are they useful? Are they in line with other companies in the sector? What do you do with them?
  10. Can you execute effectively? – Consider your history of delivering results based on time, cost, team, and features. To what extent will execution be limited by the available resources and internal structure? Is there really any evidence that you can deliver to a strategic target on the funding that you think you need?
  11. Are all major external risks being managed? – Regulation, legality, demographic changes, monopolies, or rapid technology changes all count here. What can stop you? List as many as you can think of. Rate yourself on your ability to respond to these and survive for 3 years.
  12. Is this a scalable thing? – Is there a reasonable basis to believe that it is possible, that the functions are deliverable in a commercial timescale, that they business can be scaled, and that there is a way to deliver it? Do margins improve with scale? Are there other positive scaling factors?
  13. Can the business be supported at scale? – Is there enough infrastructure available either free, or at an acceptable price, to support this business where you intend to operate? What infrastructure do you need?
  14. Can you reach the customer efficiently? – Specifically, is there a distribution method, and is there a method of advertising, distribution or even ‘viral’ spread in which the product and customer base itself has a positive influence on the speed of spread, number of customers, and the efficiency of sales? Can you prove that Customer Lifetime Value (“CLV”) is vastly greater than (“CAC”) Cost of Acquiring a Customer?
  15. Does it dominate one sector or place? – The very best companies already dominate one segment before they scale out. Do you? If you do, can your ‘formula’ be replicated quickly and cheaply to dominate other sectors, or geographies?
  16. Is the company ready to grow? – Has the company grown sales at 100% per year? Does it already have £1m of EBITDA? Perhaps £1m of Net Revenue? Rate the growth and financial strength of the business.
  17. Is the team improving as it grows, with a truly open, data driven culture? – Culture matters. Data matters more. You might not agree with Ray Dalio in Principles, but the core idea has power: does the team work with the data or with emotion? Only one is investable …
  18. Is this growing fast enough to be valuable? – Every sector has metrics for growth. SaaS companies need over 100% per year, and growth% + profit% above 40%. Indeed, any investable start-up really needs to be hitting explosive user growth, rapid revenue growth, and upward profit trends to be investible.
  19. Is your business model for making profits credible? – This breaks down into three parts: 1 what is the pre-revenue investment, 2 what is you pricing strategy, and 3 what are your costs of delivery / production? Can you create a model that is profitable per sale immediately and at scale over 3 years? Does it have positive CLV? What happens if any of your assumptions varied by 50%?
  20. Are you learning from the right investors? – Is the company pitching something for which investors have recently (last 12 months) shown a real investment appetite? Is that pitch to the right investors at the right size and to the right people through the right channels”? Are the investors targets currently investing at this level in this sector? Does your offer fit with what investors say they want?
  21. Have you created an online due diligence disclosure bundle? – Is all the evidence that you need to ask for investment and pass commercial, legal and financial due diligence in one simple online folder with an index? Is it up to date? Do you know who has looked at it? For how long? What can be downloaded? Has it been reviewed by a lawyer?

Everything needs to be perfect

When answering these questions, take into account that the whole chain has to hold up to be a success. Sometimes, I sit with founders and work through their chances of making it. It goes something like this: take the list of questions and rank your percentage chance of meeting all the criteria without investment and then with investment. What changes? Why?

(In another article, we might dig into the list of why things fail to create a ‘negatives’ list:

Punchline – you need to hit 95% in EVERY question to have a 1:3 chance of success. Business is that brutal. It’s a long chain of dependencies, and any failure in one reduces the overall chance of success dramatically.

Problem Without investment With investment FOCUS HERE
Do you have a really strong IP? 90.0% 95.0%
Are you in the right place? 80.0% 95.0%
Is it the right time? 90.0% 95.0%
Is the team good? 70.0% 95.0% <<
Is there a compulsion to use? 80.0% 95.0%
Is there a compulsion on customers to keep using? 80.0% 95.0%
Is there a market? 90.0% 95.0%
What competition is there 80.0% 95.0%
Are you measuring the right things? 80.0% 95.0%
Can you execute effectively? 60.0% 95.0% <<
Are all major external risks being managed? 80.0% 95.0%
Is this a scalable thing? 80.0% 95.0%
Can the business be supported at scale? 80.0% 95.0%
Can you reach the customer efficiently? 80.0% 95.0%
Does it dominate one sector or place? 80.0% 95.0%
Is the company ready to grow? 80.0% 95.0%
Is the team improving as it grows? 80.0% 95.0%
Is this growing fast enough to be valuable? 80.0% 95.0%
Is your business model for making profits credible? 90.0% 95.0%
Are you learning from the right investors? 65.0% 95.0% <<
CHANCE OF SUCCESS FROM HERE 1.0% 35.8%  

See more here:

Quite often, founders don’t like this. They are fixated on one area of the business: usually an idea, sometimes the need to help people. They haven’t grasped the breadth of skills needed to succeed. I try to point out that this is a good moment. The list shows them where to concentrate their efforts or where to get help before raising money. If a week or two spent getting a co-founder, a project management tool, and some more market information can increase the score above, then doing it before writing a pitch document makes a lot of sense.

Remember, the best VC barely get to a chance of 1:3 of any sort of financial success. So, anyone who thinks they have a ‘sure thing’ is deluding themselves.

And even those who get funded mostly fail –

Oh, no score can ever be 100%. Ever. The world doesn’t work like that. Random events can always happen. Staff will get sick. They can die. They can leave to become a musician on a desert island. Servers can fail at the worst possible time. Customers can be lured by competitors. Core code can be deprecated by Microsoft. Certificates can suddenly expire. Markets are fashion led, and fashions change. A random company can sue you for no reason you expected. The law can change. Another director can commit a fraud and get caught. Customers can go bankrupt. All of those things have happened to companies I have been a director of. Frankly a score of 95% is irrationally high, but a little optimism has its place, eh?

[Not sure it is worth going deeper at this stage, but the end game is the level of detail in

Having got this far, the question for any founders is: “do you really want to go looking for investment in the condition your company is in today, or do you want to get really ready before you lose time in creating a pitch deck, an offer document, and the 6 months of distraction this takes most companies?”

If they still want to go ahead, then the next post is for you. 

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