Working in an early stage, fast moving start up is often a roller coaster experience. More importantly if you are at the forefront and the issue of funding for startups takes .
Rarely dull, sometimes chaotic, often fun but always a steep learning curve.
You will have responsibilities thrown at you way ahead of expectations and norms, throwing you into a deep end you might think impossible to get out of but somehow, you find a way. The fabled ‘fake it till you make it’ mingled with an accelerating understanding of market, customer and product. It can be an intoxicating cocktail.
The downside is that start ups are unstable beasts and almost always on the verge of a financial meltdown.
At the very early stage you will be continually having to iterate as you search for the product:market fit that enables scale, amusingly described as resembling a ‘drunken walk’.
Behind the necessarily calm public face of the senior management, are a bunch of founders pedalling furiously beneath the surface in order to keep all the plates spinning and the cash plate is the one most at the risk of smashing.
Indeed a start up CEO is rarely not involved in some form of funding round and as an emerging tech leader (by design or default) within the business, you will become increasingly embroiled with investor rounds and on many occasions, your input could make the difference to closing a round or not.
If fund raising seems like an indecipherable fog then this article is here to help as we briefly drill into the different types of funding for your startup that you and the CEO might have to negotiate ….
1. Generate Revenue / Bootstrap
The Start Up press is full of news about massive rounds of funding for startup. Even at the smaller scale, start ups often try to run before they can walk and raise seed funding with great ambitions, but not necessarily a great focus.
Raising money too early is not always a positive. If you raise too early and without sufficient traction, then equity becomes very expensive and founders are on the road to dilution. Each time you conduct a raise, you give away a slice of the pie.
Bootstrap as long as you possibly can. Before you go out looking for funding for startups, drive as much revenue as possible, stay lean, keep those costs down.
2. Business Loans / Grants
One way to raise money without giving away equity, is via a business loan or grant. Here in the UK there are about 4000 different grants available, though finding the right fit can be a full time job in itself. The fantastic thing about grants, is that they’re normally free money, you don’t have to pay them back or give away equity.
The UK also has a brilliant start up loan facility – Virgin Startup Loan being a high profile partner to the scheme. Up to £25,000 per founder is available. It’s repayable and you are personally liable but, it doesn’t involve you giving away that precious equity and it could be super crucial funding for those early days.
Check out what’s available in your local business environment, before you start giving away equity.
3. Angels / Crowdfunding
Angels are such an important part of the business building process. They often get involved when the risks are highest, many of them supporting embryonic start ups in the knowledge that failure rates are high and returns far from certain.
Really useful tax relief investment schemes were introduced a few years ago in the UK and have made an enormous difference in helping very early stage companies raise funds.
What has also emerged in recent years is crowdfunding, essentially a vehicle that helps to aggregate angel investors and accelerates funding for startups and emerging companies.
Alongside the core fund raising, crowdfunding can be also be a fantastic way to validate and market your product, each investor becoming an ambassador for your business.
Good campaigns take time to prepare as successful ones generally require 30%-50% of their target already pledged before they launch on a crowdfunding platform.
4. Startup Accelerators
These are essentially early-stage seed funding ventures (often with lots of great value-add).
They often provide some early seed funding, office space, support and will take a small amount of equity. They’re looking for businesses that are addressing a large market and are likely to gain follow-on funding.
Be careful as not all accelerators deliver great value for the equity they take but it’s a popular vehicle for companies to grow.
Despite the fact that it is a busy space, you will likely be able to find a niche accelerator that suits your business industry if that’s something you’re interested in.
5. Institutional Investors : Seed Rounds / Series A and beyond …
Attractive tax incentives for high net worth individuals, have encouraged much easier way to invest and support early stage companies and with that, some regulated and institutional investors have entered the market.
In London there are a range of different funds looking for emerging companies to invest their funds.
It can sometimes feel like a beauty parade when you’re trying to find a fund that will support you as there will be a huge range of options, and it is important to keep in mind that not all types of funding for startups are created equally, and some of them will not be a good fit for your business. You can easily burn a huge chunk of time approaching the wrong type of fund.
The bigger the raise, the more narrow the funding market and the more you’re likely to need an introduction to the key players. Very few serious funds or VCs will respond to random, cold approaches and huge business plans. You need to work out who you want to get in front of and through 6 degrees of separation (aka Linkedin) do your research about how you can get a warm introduction.
Also, keep your introductory investment deck and information light. No-one wants or will wade through a 30 page IM. They want a quick fire explanation about the problem, solution, team, opportunity etc.
Also look for an institutional investor who can help you with future raises, known as follow on. It’s a very distracting process raising funds and you want to be with a funder who is capable of leading the next round and, bringing in their network to provide additional firepower.
If you’re working in a start up, then you’re always running out of money. Funding for startups is always an uphill battle.
If you’re working in a very early stage then you might be handling a complicated CTO role ahead of your career road map, what we describe as an Accidental CTO.
And if you’re aspiring to (or falling into) top managerial positions and/or founder roles, then you need to understand at least the basic mechanics of who, how and when to raise money.
Really important for any start up is to be sure about what kind of growth path you’d like.
Small Giants is a really interesting read that looks at companies that choose to be great instead of big.
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