Financing Your Business in a Credit Crunch
It’s a big week in London this week, and it’s not just me saying that, it’s a quote from TechCrunch’s Mike Butcher. Yesterday was SeedCamp, today is Geek’n’Rolla and last night I chaired the Mobile Monday London session on “Financing Your Mobile Business in a Credit Crunch.”
Raising finance is an almost inevitable part of running any business, large or small, in good times (to fund growth) or in bad times (to get through). It is something to understand, whether you are a new employee or a seasoned CEO. This post captures some of the discussion and my thoughts from last night’s diverse and talented panel, that included:
- Chris Padfield, from London Business Angels.
- Carl Uminski, long time entrepreneur (CTO of Overture, TruTap co-founder and involved in Flirtomatic).
- Pamir Gelenbe, from Newton Moore – entrepreneur and VC.
- Rose Lewis, from Pembridge Parnters LLP – again with a VC background and businesses finance experience.
The evening kicked off with presentations, including Vodafone launching their mobile clicks competition in the UK, a session on business modelling, an overview of the DKTN and also Gateway to investment – a scheme which helps prepare businesses for funding.
Customers Consulting and Product
A lot of the discussion centred on customers and consulting. Customers are clearly an important piece of the funding equation. Paying customers not only provide revenue to fund the business, they also provide evidence that the business has a credible proposition. Clearly something that is important to potential investors. While a single customer doesn’t prove you have a business (almost anyone can sell something to someone once), a few key references are a good indicator that you might be on to something.
Some businesses are funded pre-revenue, as was the case for many of the businesses that I have been involved in. If you are developing patent-able technology, or a product with a long development cycle, then clearly you are going to need funding to get through to first revenues. However, with changing development models and costs, and the more modular nature of Web 2.0 technologies, it is becoming the exception rather than the rule in the web and social technology space. Businesses are getting customers on board with early versions of the product, and after that seeking funding to accelerate growth. That means less dilution for the company founders – since the company will have a higher valuation, you don’t have to give as much of it away to raise money.
The general consensus from the panel was that web-based businesses really do need to get customers before they go for funding. With the cost of prototyping applications being so low, early development can be self-funded. Customers are key to showing that there is a market for the offering, rather that it just being a ‘good idea.’
There is a temptation for technology companies to slip into being a consultancy business, rather than a product business. Not that there is anything wrong with a consultancy business, but it has a very different valuation and structure to a product one. Consultancy can provide short term cash, but products provide revenue streams that can more easily be leveraged and grown, once up and running. Many businesses do start with consultancy and use that to build expertise and IPR that leads to a product – it takes great skill.
Timing and a Plan
The session on business modelling, and a few questions from the audience, brought up the issue of business plans. I think it was Pamir who said: “Business plans are like sausages, if you knew what went in to one you wouldn’t touch it.” In my experience, that is very true, but you still need them! Rose pointed out something that many people I speak to seem to miss: “Once you have raised the funding, what are you going to do with it?” She likes to see a 90 day plan detailing how the investment will be used.
Timing for investment was another central topic of discussion, and its always a tricky one. There are pros and cons to going early of going late, but Pamir reminded us of the truism: “The time to get money, is when you don’t need it” – If you don’t need funding, you can be more selective about who you get funding from. That gives you the opportunity to choose “better quality” money.
Not all cash is equal.
Just as some customers are a better source of revenue – either because they are prepared to be references or can help with critical product issues – some angels and Venture Capitalists are going to be able to bring more relevant expertise and contacts into your business. It isn’t just about their money, in fact almost anything but. Also, remember that headline valuation is one thing, but terms are another. Sometimes the terms of the funding can kill you down the line, or at least greatly limit your options.
If you ask a VC for money you get advice, if you ask a VC for advice you get money.
Much of the art of investment is about controlling risk, and that came up as well. As a business person you need to manage your risk, but you also need to manage (and reduce) investor’s risk.
There are lots of different options for raising money. There are 15-20 key groups of Angels in the UK, a smaller number of VCs (with funds that are active), then there are banks, competitions (ike Vodafone Clicks) and grants – many of which are regionally specific in the UK. Banks are clearly putting money into businesses, but generally only into larger, mature businesses. If you already have VC funding, then venture debt is also an option. It’s newer and more esoteric, but can be advantageous in certain circumstances – I’ve had good and bad experiences with it.
There other ways of funding your business too, and you can be really innovative in ‘raising funds’ – sometimes adjusting cash flow, for example moving to success-based cost models for sales and marketing, or choosing suppliers that will work in ways that free up your cash.
Although we don’t say it so much on this side of the Atlantic, the recession is great for entrepreneurs – Brits talk about it more conservatively. In down times there is more talent available, sales and marketing costs are lower and things are more open to negotiation – for example office space. If you are driven by costs, not revenues – usually the case for early stage start up – then hard times can be good. Not so great for businesses with big established revenues and high margins.
A big thank you to Farhan for liberally tweeting notes whilst I was chairing – another great use for Twitter, real time session notes.
[…] some senses, this post is a part II to raising finance for your business. Tuesday’s TechCrunch Geek n Rolla event brought together business start up hopefuls and […]