The coronavirus crisis has undoubtedly created a more challenging environment for any start-up, but this underlines just how important it is to have a plan in place to secure initial funding to get things off the ground.
Patrick Newton, founding partner at early-stage venture capital (VC) fund Form Ventures said that there was “no such thing as too early” to start talking to potential investors.
“If someone comes to us and they’ve got less than three months runway, then that makes us pretty nervous,” he said on a panel at the 2020 CogX conference last week.
Newton added that entrepreneurs shouldn’t be “guided by the exception” of start-ups who get an initial contract, otherwise known as a “term sheet,” within a week of pitching to a VC — “You’ve got to basically prepare for the worst and give yourself lots and lots of time.”
Gary Stewart, formerly the managing director of Telefonica‘s start-up accelerator Wayra U.K., also recommended starting to talk to people as soon as possible.
He said that he started speaking to investors for initial feedback on his latest venture, The Nest, an app helping to address the lack of diversity in tech that he co-founded, “from the very first moment that we had the idea” for it.
“I think the absolute worst thing you could do when you’re raising (funds) is to think that you should start conversations when you need to raise,” Stewart said.
Approaching investors in advance of raising funds allows you to develop a relationship, he explained. This then enables you to focus on proving to them that you are actually able to execute a business plan “because at the end of the day people invest not in the idea, but your ability to execute a plan.”
Angel vs. pre-seed VC investor
Yi Luo, an angel investor and head of strategy at payday advance app Earnd, said it was also important to determine what type of investor you are approaching.
For example, with “angel” investors — high net worth individuals who typically back small start-ups and entrepreneurs — there are both those who invest professionally and others who might do so for other reasons, such as an interest in the business area or it being the business of a friend.
Meanwhile, there are also “pre-seed” VC investors, those who are working for a fund or firm investing other people’s money into a company at product development stage.
Luo said understanding those differences were important as an angel investor, for instance, might not “necessarily be looking for a very structured pitch.”
With pre-seed VC investors, on the other hand, there is typically “more expectation” from a start-up pitch, so they’ll likely be looking for something more “polished” when being approached for investment, reinforcing the importance of starting conversations early.
Post-Covid-19, any early-stage companies should be prepared to give themselves longer to raise funds, said Newton.
“I’ve heard some people say 18 months minimum … whether it’s 12 months, 18 months or 24 months, it’s just basically as long as you can raise for,” he said.
Since the start of lockdown in the U.K., there has been a 45% fall in the number of investment deals for companies at seed, or early stage, according to data from workspace provider Plexal and start-up database Beauhurst.
They found that funding was 85% lower for U.K. tech start-ups that were raising money for the first time, between March 23 and June 9, on the same period as last year.
Nevertheless, £54 million has still been invested in start-ups that had never received funding before, the poll of 30,000 businesses found.
Stewart said that in the case of The Nest, while previously he would have reached out to something like 40 angels to get one investment, he is now “going with 120 or 200.”
“So it’s basically just kind of casting as wide a net as possible, do not be conservative, raise as much money as you can, raise more than you can if at all possible,” he said.