Having a sufficient level of cash as a small business is a constant challenge; you have to pay your staff, cover business costs, fund your own salary and much more.
Cash is king which is why securing finance can make all the difference between business success and failure.
Yet, many start-ups and small businesses in the UK aren’t aware of the various funding options available or where, and who, to go to for funding.
We know that funding is a major focus for the UK’s start-up community. “Should I get a Start Up Loan?”, “Am I eligible for SEIS (seed enterprise investment scheme) funding?” and “How do I pitch my business to investors?’, are just a few of the many finance-related questions asked.
To answer these very questions and offer greater clarity on start-up funding, successful UK investors and entrepreneurs came together at the Plusnet Pioneers Funding Masterclass in Birmingham to share their advice on raising investment and managing cashflow.
Hosted by Plusnet, in partnership with Startups.co.uk, the rousing Birmingham Masterclass panel included Dragons’ Den star and finance expert Sarah Willingham, Nutmeg CFO Tracy Sambrook, and Vita Coco EMEA CEO Giles Brook.
Jordan Daykin, CEO of GripIt Fixings, and Leigh Purnell; founder and inventor of Petalite, completed our line-up of inspiring Funding Pioneers.
Read on for their top tips on where to find the money to take your small business to the next level…
Funding Masterclass: Get to know the panel
Giles Brook, CEO of Vita Coco EMEA and founding partner of natural snacks brand BEAR:
“With Vita Coco we got external investment which allowed us to really accelerate the business but with BEAR we got the business to almost £25m [turnover] with myself as an investor and the founders collectively investing less than £100,000. So this was a real seeding start up. We literally raised no external investment. People will tell you that it’s impossible; it isn’t but clearly different routes will deliver different outcomes.”
Sarah Willingham, Entrepreneur, investor and personal finance expert:
“We have 11 investments now and I’ve seen so many pitches and worked with a lot of small businesses. All of the businesses [I’ve worked with] have funded in so many different ways and gone on that journey of very early-stage to later-stage funding with significant debt or equity.”
Jordan Daykin, CEO of GripIt Fixings:
“We’ve just raised £42m for Nutmeg. A little bit of what I’ve had to do […] is wing it a bit because it was the first time that I had been involved with such significant fundraising.”
Leigh Purnell, founder and inventor of Petalite:
Funding Masterclass: Finding funding for your start-up
Sarah Willingham: “It’s very natural for a business to start to get a bit of movement and then to say ‘We need to fundraise’. I would push back on that and say ‘Do you?’ Do you actually need the money right now or can you get a bit further down the line? One of my Den investments, which is absolutely fantastic, started with just £2,000 on a credit card; I invested £75,000. Really, what the business needed was help – they wanted to get smarter and [to do things] better.”
Leigh Purnell: “When you look at your business, you have to look [at it] from an outsider perspective. It doesn’t matter how great your product is, you need to look at it and say ‘How does an investor see that as a risk?’ You de-risk it, prove the market etc. and then that will serve you better when you go for [investment].”
“What about the current funding climate? Is now a good time to raise start-up finance?”
Leigh Purnell: “Things have been uprooted because of Brexit. It’s just the unknown for the next two or three years, however there are a number of institutions and angel groups that are very much actively involved. One of the good things about the UK is that we have SEIS and EIS tax relief which is a massive de-risker for any investor.
“I’d say the market is good. […] We’ve done SEIS up to the maximum and have completed two rounds of funding now. We’ve done crowdfunding which is a good and a bad thing and there are avenues. No-one goes to the bank; I don’t think anyone went to the bank 20 years ago, unless you wanted to buy a property, just because of the risk profile.”
Jordan Daykin: “We’re doing a second crowdfunding round now with Crowdcube. There is an element of people holding back. This time last year we raised [crowdfunding] and our campaign was 100% funded in five days, this time we’re about 90% funded and it’s taken us about 15 days. It’s taken us longer but I think that’s because people are a bit more tentative. There is definitely money still out there though.”
Sarah Willingham: “For an absolute start-up business, I think Kickstarter [reward-based crowdfunding platform] is great because you’re effectively getting your customers to pre-buy your products.
“There are Start-Up Loans as well. I personally prefer Kickstarter if you’re selling a product because there’s no interest rate attached to the product, you just need to produce the product with the money you’re getting.
“[Raise] as little as possible in the early days and just do as much as you can to prove the business model before you start to go out for investment.”
Sarah Willingham: “The introduction of SEIS – the Seed Enterprise Investment Scheme – in 2012 made a significant difference [to start-up funding]. If you are going out to try and raise funds, investors can offset the money they invest against their income tax and, if they hold shares for three years, they don’t pay any capital gains tax.
“It makes a really big difference because, as an investor, a lot of that risk is taken away. As far as I know we are the only country that does it. I think it’s the single thing the government has done, in my opinion, to encourage business in the UK because it’s so attractive for investors. If you’re thinking of raising funds, it really is worth getting yourself registered first for SEIS and most companies are eligible.
“I’ve had situations where I really wanted to invest in something as SEIS but we then had to go through all the paperwork; sort yourself out before you go for investment.”
Giles Brook: “When you’re looking at an investor, really think about the criteria that you want. For some [businesses] it’s about trying to get the money in as cheap as they can [for low equity], for others it’s about the strategic value the investor brings.
“For me, one of the most important factors to look for in an investor […] is that their behaviour stays consistent in the good and the bad times – particularly when the numbers aren’t delivered or the market is going through a challenging time. When you’ve got an investor [like that], who gives you exactly the same reactions and behaviours throughout [the process…], it’s very endearing.”
Tracy Sambrook: “It’s all about simplicity. You really have to be able to explain ‘Why us?’. There were investors going around at the time [we were raising], looking at the fintech environment in London last year and we were just one of many potential investments in robo-advisory. We had to be clear about who our target customer base was and why we believed we were valid. We had to research and have fairly robust numbers behind the size of the market opportunity.
“Also, don’t try to be too clever with your numbers; make them accurate. No matter what you’re raising – big or small – don’t have 20 different versions of your financial plan. I had to work very hard to ensure that myself and my CEO only had one version of the truth.
Leigh Purnell: “My first experience with angel investors was the worst but the most memorable. After I’d pitched to 20 angel investors sitting round a table, the advice that came out of that meeting was: ‘Can you please not bring your prototype product in a Sainsbury’s bag, it looks terrible.’
“It stuck in my mind that everything from start to finish [with fundraising], from the first moment you meet an investor all the way until you sign the papers, is about image, integrity and how you present yourself. The [investor] wants to make sure they can trust you with their money.”
Sarah Willingham: “When you start to go down the equity route where you’re selling off part of your business, the sooner you can prove a business model – I’m not talking about getting significant revenue or profits – rather than the hypotheses, that’s when you’re going to be able to raise at a value that isn’t too difficult.”
Jordan Daykin: “You’ll see people on the [Dragons’] Den who get asked questions and they don’t know the answer and they try and drift over it – they start speaking about all sorts of different numbers – and the [investors] can see that. For me, I think Deborah [Meaden] said she could see my honesty when I [admitted] I didn’t know the answer. It comes back to simplicity, if you complicate things too much and you try and lie and cover things up, people will see through you; especially an experienced investor.”
Giles Brook: “As an investor now my whole principle is no surprises.
“[With BEAR] we found suppliers that were giving us good payment terms relative to our credit rating. We tried to make sure all payments were on time or if it wasn’t, tell them payment would be with them within 10 days.”
Jordan Daykin: “Crowdfunding is very different to [a pitch to investors] because the investor doesn’t really see you, yet you’ve got to give that personal approach.
“It’s not just a case of setting up a crowdfunding page and saying ‘I hope you invest’. You’ve got to have a video and a marketing campaign. We’ve just held an event to [support our campaign] and it’s about getting people to come and meet you and making yourself available – any serious investor will want to come and meet you.”
Giles Brook: “We looked at every part of our business model and said ‘How do we make it as strong as possible and make this money work as hard as we possibly can?’ We had some very simple principles around it, for example, there were minimal gross margins that we were willing to operate on. In the world of food and drinks, the gross margin is sacrosanct.
“Having a viable business from day one is really important because, if you can generate cash at gross level, you’ve then got your discretionary spend where you can afford to build your brand, invest in people and infrastructure. I’ve come across a few businesses where, from day one, they are struggling with gross margin levels, and unsurprisingly they immediately struggle with cash flow.
“As the business grows, especially when you’re building a wider team alongside you, it’s key to make sure every penny sweats as hard as possible.”
Tracy Sambrook: “It’s about trying to create a growth business of some frugality. It’s not a ‘yes’ or a ‘no’ when it comes to [making financial decisions]. Think: is it value for money, is it going to generate something?”
Start-up funding checklist
o Consider whether you need start-up funding. It may be mentoring you’re looking for in actuality
o Ensure you can prove your business model before seeking investment
o The same goes for having healthy financials and gross margins
o Find an investor that matches your funding requirements
o When pitching, remember that investors will look at the business and you as the entrepreneur
o Explore your funding options: From crowdfunding and Start Up Loans, to SEIS and equity investment
o Once you get funding, use it wisely. Be frugal!
Plusnet is on a mission to help small businesses and budding entrepreneurs grow and has teamed up with Startups.co.uk to create Plusnet Pioneers, an exciting programme of content, events and mentoring. Views were expressed at a Funding Masterclass held as part of the Plusnet Pioneers programme. Article written by and first published on Startups.co.uk.