A lot of the work we do with early-stage companies at the Sussex Innovation Centre involves helping entrepreneurs to understand what goes into building a sustainable business. Much of the advice imparted by these columns in recent months has been about achieving sustainability – common sense approaches and good working practices that can help most new businesses to survive, grow and turn a consistent profit.
With a percentage of companies, though, there is an opportunity beyond sustainability. These are what we term ‘high-growth’ businesses; those with the potential to scale up significantly given the additional resources of funding or investment. As well as demonstrating this kind of scalable opportunity, your ambition and a track record of managing a sustainable business will often be key to showing people why they should fund you.
There are several different routes to gaining the funds necessary to scale a business. You could choose to pursue a traditional ‘angel investor’ model, attempt to secure a loan or grant, or rely on relatively new approaches to raising capital, such as crowdfunding. Each involves a different audience, and requires a slightly different emphasis on those key elements of your pitch.
If your business is built around a new technology or intellectual property, you might want to investigate what grants and funding opportunities are available to support research and innovation in your sector. Government initiatives such as Innovate UK allocate funds to a range of different projects – generally new ideas that have the potential to impact upon society. This approach might require reshaping your proposition to fit an award brief, but it can give your work added credibility and prestige, as well as providing the funds necessary to develop an idea.
If you’re looking for a loan from a bank, your sustainability is the most important thing. Banks want to know that you will be able to pay them back on the agreed terms, with limited risk involved. Sound, sensible financial projections that show a consistent return on investment are the order of the day.
Pitching for investment is an arena where demonstrating the scalability of your business is key. Investors aren’t afraid of taking risks, but they want to see a clear opportunity for the kind of growth that will provide them with a significant return on their investment. You’ll need to prove to them that there is a big market for what you are offering, that you know this market intimately, and that you understand how to keep increasing your revenues while keeping your operational costs low.
One of the main difficulties in pursuing investment is knowing when the right time is. At the Centre, we try to help members negotiate that uncertainty with an approach called Lean Investment, which aims to take the pressure out of the pitching environment by encouraging collaboration between early-stage companies and potential investors. By setting the expectation that the companies involved are not yet investment-ready, our community of investors are motivated to provide entrepreneurs with insight and feedback as to how they can shape their businesses to become investable in the future.
“Pitching too late may mean that you run out of money before receiving investment,” says David Porter, who manages the Lean Investment programme on behalf of the Centre. “It is rare for a company to receive equity funds within 3 months of starting to look for it; count on 6-12 months. If you are offered investment, you may find yourself with a less attractive deal if you are in a tighter financial situation, because you have fewer options.
“Conversely, if you pitch for investment too early you may show yourself to be unprepared, and in the wrong circumstances that can put an investor off for good. One way of engaging very early with investors is to set their expectations and be clear about where you are in terms of your preparedness. That’s the principle behind the Lean Investment Platform.”
Many of the points raised at these Lean Investment events are common issues that provide valuable insight and advice for any business at the start of its journey towards investment:
- Valuation – if you’re investment-ready, it’s important to give clear valuations, in terms of how much money you need, how much you believe your business is worth, and how you justify that valuation. You can only know how much money you need, and how much you want to give away, when you have full financial projections with cash flows. If you haven’t reached the stage of knowing your cash shortfall, it’s better to be upfront than to make up a number.
- Enthusiasm – it may sound obvious, but being well-versed in the sector you’re looking to move into is a must. You don’t have to show everything in your presentation, but investors will expect you to know current trends inside out. It’s not just demonstrating that you know your stuff, it proves that you have real enthusiasm and passion for the subject, and that you’re really going to commit to making a go of your business.
- Proof – if you state ‘definitive’ information, make sure that you can back it up. Carry out tests to show that your product performs exactly as you say it does, or that the market is exactly as big as you say it is. If you haven’t built a prototype or done extensive market research, then make it clear that you are giving assumptions, and explain why those assumptions are likely to be correct.
- Opportunity – it’s easy to get lost in the technical detail when you’re demonstrating something you’ve created, but investors want to see the bigger picture. Tell a story about the opportunities your idea creates, rather than the features it has. Likewise, if an investor wants to know the detail of your financial projections, they’ll ask. Don’t waste valuable presentation time on explaining detailed numbers, at the expense of describing the problem you are solving for your customers.
- Clarity – be clear about what you want from the investor – and it doesn’t just have to be about money. If there are gaps in your skills or knowledge, then let them know that you understand that, and what you plan to do about it. If you need introductions to help you get the financial or marketing plan right, then asking for them can be even more valuable than cash.
- Practice – this is a fundamental point, but one so easy to miss that it’s always worth restating. Rehearse your pitch. Know how much time you have, and what the essentials are that you need to get across in that time. Whether it’s a one minute ‘elevator pitch’ or a formal, ten minute presentation, know exactly what it’s possible to express in that time and refine your speech accordingly. There’s nothing worse than building up to your ‘big reveal’ and then having the clock run out before you can pull back the curtain.
One final option for getting together the money you need to launch a new product or service is to look into crowdfunding sites such as Kickstarter or Indiegogo. These sites give you the opportunity to raise money directly from potential customers who want to see your idea brought to market.
Centre members Wonderlabs have recently been successful in raising more than $15,000 to launch their new product Tweet Rocket, a hybrid social media management tool, by offering a range of discounts and perks in exchange for donations.
“Crowdfunding made sense for our business model for several reasons,” says Arni Lochner, Creative Director at Wonderlabs. “It allowed us to scale our business without giving away equity and without spending time and money on writing a formal business plan. At the same time it acted as an effective marketing campaign to get the Tweet Rocket brand known, with a definitive deadline and goal that kept us motivated with very tangible results in the form of shares and contributions. By crowdfunding Tweet Rocket, we were able to gauge market demand and receive community feedback about our product at very little cost.
“A key piece of advice for anybody looking to run a successful campaign would be to prepare your marketing strategy well in advance of starting your crowdfunding campaign. Always reach out to your inner network and grassroots supporters for funding first and once your campaign has traction and credibility, then reach out to PR and news outlets to spread the word about your campaign on a wider scale.”
Joseph Bradfield is a communications specialist at the Sussex Innovation Centre, an incubator for high-growth businesses based at the University of Sussex, where he works with growing businesses to help share their innovative ideas with the world. He writes a monthly column for entrepreneurs and start-up companies, drawing on the experience of the Centre’s dedicated business support team to provide step-by-step advice and insight, helping readers to navigate some of the challenges involved in launching a new enterprise.