Capital for your venture, without the VC.

18 July, 2021 | insight

When your business has traction, and perhaps growth is outstripping the capacity of your working capital, that’s when business owners might turn to investment funding to provide enough financial support to push growth even harder, whilst giving profits time to catch up. So often when a business in this scenario approaches us for advice and investment, the question is asked ‘how much equity do I give away’?

Across the globe this is a common theme for anyone scaling up their business, and in western countries at least there has been a recent shift that has allowed for augmentation of the typical investment model – by way of government underwritten loans and grants on a scale not seen before.

In many cases businesses found themselves with sudden and easy access to bank loans that had previously been out of reach for all but the most mature businesses. Added into the mix was various match-funding initiatives (such as the Future Fund in the UK), and that meant a fairly conservative investment raise could result a substantial wind fall in real terms once the government added their contribution to the kitty – the resulting risk mitigation put all parties in a position to agree (or at least negotiate) that less equity needed to be carved out in the process. This is an investment model we have long advocated, well before the free flowing government money, so it’s a welcome shift in dynamics.

An example of how far a well planned piece of structured funding can go is the extended reality data start-up, BadVR. When they learned that one of their core corporate partners, Magic Leap, was about to shed 1,000 jobs BadVR was unfazed. Despite the fundamental ties that saw BadVR positioned as an enterprise application on the Magic Leap platform, the startup saw it as an opportunity to pivot away from reliance upon consumer-focused apps. Still, this required funding to ride out the transition.

The first step was to access money from one of the government’s business support schemes, to bolster working capital and maintain headcount. Eventually, the company managed to land additional financing in the form of a grant from the National Science Foundation.

What the Magic Leap story shows is that companies don’t necessarily need to take on fully loaded venture capital to make it. Indeed, as costs come down through remote working, and with the gig economy offering democratised access to all the necessary engineering talent, thrifty startups have been able to source much of the capital they need from government sources and corporate innovation grants, giving away much less equity in the process. That’s how BadVR ultimately got hold of roughly three million in funding.

Many entrepreneurs consider fundraising to be the first and most crucial step to starting a business. And a quick online search will give credence to this overcooked viewpoint – there’s no shortage of articles out there about how to raise large amounts of money for your startup (though I add a caveat that it’s typically rapidly growing startups with proven market traction that attract much of that investment, highlighting the point that it indeed shouldn’t be the very first thing you devote time to).

But the notion that you need to fundraise at all can be misleading.

In many ways, fundraising is actually antithetical to the entrepreneurial ethos as it can limit your freedoms to build the kind of company you want – if you’re faced with giving away a substantial amount of your company in return for funding. And there are other ways to get your company off the ground, where the equity you give away can be greatly reduced. Often when we place funding into companies we can take comfort in the fast growing revenues that the company is generating, and the market penetration they’ve achieved, meaning we can offer hybrid funding models that leave founders with a greater equity share – which they can retain for future value, or hold in the cap table for follow-on funding rounds at a higher valuation.

Here’s a point for consideration: entrepreneurship is fundamentally about freedom.

I’ve heard it said that “if I borrow money from a friend, I have to pay him back eventually. And I’ll be thinking about it until I do, because I know he’s counting on it. The same thing happens when you borrow investor money”.

Most entrepreneurs found themselves in business because they felt constrained by being tied to their boss or their boss’s company. They had an original idea they wanted to pursue without being tied down by someone else’s rules. When you take in money from a VC you might find this is similar to being governed by your former CEO, and you might lose some of that freedom. On the flipside, you pick up the support of additional minds and experience that might open doors to really propel your business to new heights – so weighing up the pros and cons in relation to your objectives sits at the heart of the fund raising process.

When you’re dependent on investors, eventually, your company might stop looking like the company you started, and there’s not much you can do about it. This may be because investors opened doors for you that you hadn’t considered possible, but it may also be because the investment board had influence and ambition that’s not entirely aligned with your original plans.

Also consider that if you’re too focused on fundraising, you might be overlooking what’s most important. Entrepreneurs often find that by focusing on what really matters – that is, what you’re selling and the customers you’re serving – the money comes to you. As an entrepreneur, you have to be self-sufficient.

As a final thought, it could be said that the goal of entrepreneurship is to become a business owner by building a product or service that lasts for years, even decades and beyond. This is what separates the true entrepreneurs from those who simply own a business. Keeping your ambition aligned more closely to this notion, and less to the single goal of raising as much money as you can, does much to separate you from the rest of the crowd.