Is early-stage fund raising all about the founder?
Damian explores the role the founders play in attracting investors and delves into 3 things Founding Teams can do to drive investor appetite and commitment at those critical early stages.
3 minute read
In the early rounds of investing; pre-seed and seed rounds, the Founding Team and their clarity of vision do drive the value of the business and the appetite of an investor. At these early stages the business typically does not have proof of concept or significant validation of product-market fit and so an investor must assess the credibility of the Founding Team, and how likely they believe this team will be to succeed.
While first capital raising rounds are typically small (up to approx. £500k), they can vary when the Founder/Founding Team have a track record of scale-up success or solid exits. You hear of high-profile entrepreneurs achieving significant early raises and most often these Founders are not first-time Founders. They will likely have proven their capability to build, scale and exit a venture previously, even if in a different sector.
Personal networks can also support a Founding Team raise additional capital. Links to investors with a higher risk appetite often lead to higher funding rounds.
That being said, the majority of Founding Teams looking to raise early-stage funding are not entrepreneurial celebrities and do not have a black book of investors ready to take risk. So what can these Founding Teams do to attract investment?
Be clear on vision – and how to achieve it
Many early-stage businesses have a product vision, but a business vision is so much more than that. A business vision creates energy and alignment and is often guided by purpose.
It is important that a vision isn’t abstract or cloudy, it should clearly state what the business is going to do and how it will be done well. A strong purpose and vision will be set in the context of the market dynamics in which the business operates - and will therefore inform business positioning in the market.
Key to attracting investors through vision is to have an understanding of the available market for the business offering, and how the business will attract that market.
Be crystal clear on deployment of funds
Raising money for a business is a journey, not a transaction. When a business takes on external investment they are likely on a ‘funded path’ and will take on additional investment as the business scales towards its vision. Funding accelerates growth and typically supports achieving a higher valuation over time.
A specific capital deployment plan will not only give investors confidence that their investment will be maximised, it will also demonstrate capability around use of funds to future investors – showing that the business knows how to maximise runway, and budget effectively.
Don’t be a perfectionist
Whilst early-stage funding is mostly used to support product development, a mistake we often see is a perfectionism on the technical side of the business that stalls market release.
Not meeting timelines for commercialisation often means returning to investors, cap in hand. This is where we will often see investor fatigue which can be detrimental to the future funding journey of the business.
In order to qualify for institutional funding, a business will usually be required to demonstrate proof points in the business model to give potential investors confidence about commercial traction.
It tends to take longer, and more money than anticipated to demonstrate commercial traction ready for an institutional/Series A round – average figures say 4 years, and £4-5million. Our advice - don’t over promise your early investors when it comes to timelines, and engage investors prepared for multiple rounds of funding.
You could argue that whether you are an entrepreneurial celebrity, have a strong network of active investors or have neither of these benefits – early-stage investment does come down to the Founding Team. Ultimately it is all about capability and without any head-starts, the Founding Team can demonstrate capability through vision, deployment of capital plans and a realistic understanding of go-to-market timelines and investment requirements.