Pillar 3 – Introduction to the Investment Landscape

Pillar 3. Introduction to the Investment Landscape

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How do you know what funding you need?

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A huge question all early stage founders have to answer and when it’s your first time it’s pretty daunting at first. There are a wide variety of ways to finance a startup, and each has its own pros and cons. It’s never simply a case of “let’s go and speak to some investors.” That’s like saying, “I’m hungry, let’s get some food… but yes what kind of food. Funding comes in all different flavours, and it is suited for different risk profiles, different stages, different returns, etc.

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The obvious area of equity funding, for example, can provide a company with much-needed capital but it can also dilute the ownership stake of the founders as you sell part of the company. Whereas, debt financing can help a company avoid giving up equity, but it can also put the company at risk if it is unable to make payments and needs a trading history before you are considered.

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So navigating the different types of startup funding can be a minefield, but understanding the key characteristics of each and for what stage can help founders make the best decision for their business.

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What is the investment landscape

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The investment landscape covers a whole range of different investors, all with different investment criterias, investment amounts, investment thesis and value adds, such as;

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Friends & Family
Incubators
Accelerators
Angels
Angel Groups
Family offices
VC
PE
A whole host of different types of debt providers

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These different types of investment sources are suited for different stages of a company’s journey, so whether you are an initial idea, pre seed, seed or series A and beyond they will all need to be approached differently at different stages and offer different benefits and value. Then even when you know the right investor type for the right stage, you still need to understand their investment needs, which is their individual investment thesis.

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What is an investment thesis?

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A thesis is an investor’s criteria to define what type of deals they will invest in, like their guiding rules. Some are extremely specific and others are very broad, but each different investor type will have some form of thesis. For example a VC may look to deploy amounts from £1m to £5m in Series A or B in the Edtech, Medtech or Agritech sectors and require a minimum revenue of £50k per month. This is quite a tight thesis, but shows an example of sector, cheque size and revenue levels as just a few qualification criteria. They may also only look at founders from a minority background, or founders who are 2nd or 3rd time entrepreneurs, or to play an active role in your business. They set the criteria, you need to find out what it is to avoid contacting the wrong people and wasting a lot of time.

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Understanding the landscape early

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Having this understanding at the beginning can save you significantly; as it’s about knowing what milestones and trigger points your business needs to reach to open up different types of funding, which have a range of different pro’s & con’s around their cost, dilution, risk, ease of access, valuable experience gained and appropriateness for your business and its longer term trajectory.

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There is a clear risk of wasting a lot of time in the process of approaching the wrong people, but having this prior knowledge when choosing the right type of startup funding can help to minimise that risk and give your business the best chance for success even though obtaining thesis information may be a bit harder sometimes.

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There are a number of factors to consider when selecting startup funding, but the most important objective is to plan ahead and choose an option that is appropriate for your specific business journey and needs and not just the immediate period.

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For example, if you are starting a high-risk venture, it may be wise to seek out investors who are willing to accept a higher level of risk in exchange for a higher potential return on their investment. So this will immediately remove certain investor types as there maybe tax incentives for investors of riskier investments. On the other hand, if you are starting a more conservative business and plan on bootstrapping yourself or with limited funding then, you may want to consider a loan or smaller amount of equity from a family or friend. By taking the time to select the right type of startup funding you will save significant time and energy and be more in control.

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Understanding the investment landscape and different investors thesises will save you considerable time, energy and money as you avoid thousands of wasted emails reaching outs to completely unsuitable investors.

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Different options, different considerations

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The key considerations to weight up, when exploring this all, is to understand;

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Your own risk appetite – boom or bust or sensible & steady…
The speed & growth you want to achieve
The number & type of people you want to have involved as shareholders
Level of external influence

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An important task we recommend any founder to take is to have that open and honest chat with yourself in the mirror. Take a moment to step back out of the excitement and potential success of fast cars, jet setting and big houses and ask yourself; “What if I lost it all? How would I feel, what’s at stake and how would I cope”.

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It’s hugely important to not get caught up in a blinkered vision of only success as the odds are stacked against you, the vast majority unfortunately fail and the aftermath of this can be painful to handle. If your parents back you with their life savings out of pure love and parental belief, but you ended up losing it, then what situation would that create, its sobering, unthinkable, but a reality and has a high probability.

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So choosing the right funding is paramount as you have to live with the decision to take other people’s money everyday and this can create a huge burden for some along carefully balanced with the immense opportunity it also presents.

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Before choosing your initial funding type, step back, look yourself in the mirror and ask; “What if I lost it all? How would I feel, what’s at stake and how would I cope”. This helps you understand if you are willing to lose other people’s money, put yourself in debt or simply grow slow and steady.

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What funding is right for you?

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All funding is not equal and the cost of money varies greatly. Understanding the cost of each type of capital helps you evaluate the best options at each stage of your growth. Different stages of growth create different types with very different costs attached . You may have heard the expression “debt is cheaper than equity” and in simple terms a loan with some interest which you can simply repay and move on, whereas equity costs you a slice of your business plus some dividends on profits along the way. That’s it in a simple form, however, if you don’t repay the debt then you could in the worst case lose your whole business, so a loan could be far more costly than equity. So, be aware of the true cost of different types of funding and understand the important funding objectives and risks;

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All funding is not equal and the cost of money varies greatly. Understanding the cost of each type of capital helps you evaluate the best options at each stage of your growth.

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Objectives for the Investment pillar in the FundingHero platform

Learn which investors are right for you
Learn which funding is right for you at what stage
Learn what an investors thesis is

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Avoid the risks of getting it wrong

Wasting time approaching the wrong people
Not knowing how to approach them and how to talk their language
Taking funding that is too expensive & inappropriate

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How we help

To make it simple, within our platform we have split this pillar into 3 so we dig in and explore three of our canvases as the core areas to really build your understanding and help you make an informed funding decision;

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Funding sources – the different types and their benefits
Finding funding – how to fund it
Smart funding – the rocketfuel where you create significant value

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Use these canvases as useful prompts and considerations before you finalise your funding plans.

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Fundraising shouldn’t have a 99% failure rate…

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FundingHero is your all in one platform for tech founders looking to raise their early stage funding. We teach you the rules of fundraising to help you to Learn, Prepare & Raise.

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Our platform gives you access to:

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