You read and hear a lot of advice on business funding, but in this constantly evolving scene, it can be difficult to keep your knowledge up to date and judge what will work best for your business in today’s world. To give you the latest insights on what funders are looking for and trends in equity and debt financing, the Business Funding Show interviewed some of the foremost experts in UK funding:
Here’s what we learned.
What Funders Are Looking for in a Business
- A strong team. Xavier Ballester (Angel Investment Network) identifies the founding team as the most important aspect of an early-stage business. What constitutes a good team? According to Eyal Malinger (Beringea), a good team ‘can demonstrate their passion for the problem the business is solving and why they have the relevant domain knowledge, complementary skills, and expertise.’
- A clear culture. 'Culture is a very important element of great companies, and we spend quite a bit of time trying to understand the kind of culture the entrepreneurs are trying to build,' says Malinger.
- A unique, solid business model. According to Vasco Nemitz (AIS Group Germany), some founders, despite having a great business idea, 'forget to generate revenue along the way' and fail to clarify how the business will make money. Ideally, the model will also be original. Malinger encourages entrepreneurs to ask themselves: 'Why is what this business offers different?'
- Market savvy. Malinger advises, 'Unit economics and market size play a significant role - entrepreneurs know that investors will want them to dig deep into their numbers, but you also need to display a holistic market knowledge.'
Sectors on the Rise
While many investors are open to opportunities in any sector, the following industries are receiving particular attention in 2017 among the funders we interviewed:
- health and life sciences
- innovation in everyday tech, including the Internet of Things
- fintech
- food and beverage
- blockchain
- media
- B2B
- augmented reality
- virtual reality
- artificial intelligence, and enterprise applications for it
- machine learning
- proptech
Trends in Equity Funding
Brexit has a low impact on investment
Despite widespread fears, it appears that Brexit’s threat to equity investment was short-lived.
For three months before and three months after the referendum vote, angel investment was 'dead,' says Ballester, but 'now it has picked up to pre-Brexit-debate levels.'
On the venture capital side, Nemitz 'had several discussions with investors about Brexit and its consequences, and most of them don’t see a showstopper here. However, we expect many investors to be more tentative about UK investments.'
Fewer deals but more value from VC firms
Especially at the seed and early-stage levels, Nemitz observes that the number of European VC deals is decreasing while the total value of the investments is increasing. A KPMG report of Q3 2017 investment found the same trend in the UK.
Why is this happening? Nemitz attributes the trend to intensifying due diligence processes. 'Generally, investors are much more selective and cautious about their potential investments.' Those who survive the tougher due diligence are rewarded with larger deals from confident investors.
Angels invest smaller values but diversify more
Meanwhile, according to Ballester, angels are investing slightly smaller tickets but diversifying more than they were a few years ago. The average ticket in the broking division of his network, Ballester estimates, is now £55,000 - £60,000.
Choice of equity crowdfunding platform becomes more important
With so many equity crowdfunding platforms now available, Oliver Woolley (Envestors) and Goncalo de Vasconcelos (SyndicateRoom) agree that an entrepreneur’s first concern should be what type of investors they want to attract. Their platforms, along with Bill Morrow’s Angels Den, aim to attract sophisticated investors who choose their investments cautiously but offer much larger amounts of capital than investors on most crowdfunding platforms.
'Different platforms will offer different approaches,' de Vasconcelos explains, 'and it’s important to work with a company that fits well with your needs.'
After an entrepreneur has identified an appropriate investor type, consider these five key questions from Horbye (Seedrs):
- What class of shares are offered and who will manage them?
- When will I get my money?
- Who can invest in my business?
- What are the fees involved?
- What is the repeat investment rate of platform investors?
Crowdfunding is increasingly used as a marketing tool
Nowadays, 'just saying you’re crowdfunding isn’t going to get a business into the headlines,' says Horbye. However, that doesn’t mean that equity crowdfunding can’t be used for marketing. In fact, it perfectly 'combines the two elements that any growing business needs: capital and brand awareness.'
However, businesses need to be creative in how they leverage their attention from the crowd for marketing. To this end, early and clear communication of the brand message and active engagement with investors are key.
According to Andrew Adcock (Crowd for Angels), successful crowdfunders know that they need to 'prime the crowd' and 'seed the land' well before the launch of their campaign. This means generating traffic and hype with a strong marketing strategy.
Also, more businesses are pairing an online campaign with in-person events. Why?
Firstly, not content to meet the founder only in a video, serious investors will expect face-to-face engagement, according to Woolley and Bill Morrow (Angels Den). 'Even the most technically savvy online investors still like to come to lunches and investor meetings,' observes Woolley. 'They also still like to have hard copy magazines, even though we make everything available online!'
De Vasconcelos believes the real value lies in the synergy of online and offline campaign components. 'When different facets come together, from investor testimonials and media coverage to pitching events and one-on-one meetings - the results happen.'
Crowdfunding success attracts corporate venturing divisions
Corporate venturing divisions are increasingly looking to crowdfunding platforms to scout businesses of interest, aiming to co-invest with the crowd or invest in the business’s next round.
Horbye believes corporate venture arms value the validation that crowd investors bring to a business. Successful crowdfunding 'proves that the crowd believe in the team, the business model, the mission.'
Also, using crowdfunding in this way also saves corporations a lot of work. Woolley notes that 'large corporations are traditionally poor at business development and like to invest in early-stage ventures created outside their organisation, rather than an in-house development team.'
Trends in Debt Funding
Challenger banks emerge
The difficulty of traditional banks to meet the demands of entrepreneurs was a source of inspiration for challenger bank founders like Joel Perlman of OakNorth. OakNorth have eagerly embraced technology that makes borrowing easier for entrepreneurs. In the young tradition of challenger banks, they have designed their IT 'from scratch,' use artificial intelligence to make their processes more rigorous and flexible and were the first UK bank to be fully hosted on the cloud.
Traditional banks improve their tech
Traditional banks are also making the most of advances in fintech and artificial intelligence. Perlman observes, 'With advances in big data, open-source software, cloud computing, and processing speeds, more and more banks are using fintech to improve their product and service offering and enable them to compete.'
Meanwhile, artificial intelligence is 'changing banking in many ways and appearing in many forms - chatbots which help to improve customer experience, predictive analysis to forecast spending patterns and help customers manage their money more effectively, model scenarios to improve capital planning, etc.'
Banks partner with alternative funding platforms and the UK government
The need to provide their clients with more options has led some banks to form partnerships with equity crowdfunding platforms and fintech companies. Why? According to Horbye, such partnerships 'future-proof' traditional institutions 'by giving their customers access to innovative finance solutions they cannot offer themselves.'
Another approach to improving bank services for entrepreneurs is making deals with government organisations. 'In July, the government announced that it had struck a deal with the big five banks to extend millions of pounds of lending to export-focused companies. The deal means banks can provide export-related trade finance to SME customers.' More banks, traditional banks as well as challenger OakNorth, have also joined the British Business Bank’s Help to Grow Programme, a government initiative that provides growth loans to smaller businesses.
Whatever forms of financing you consider for your business, these insider observations are a reminder that both traditional and alternative funders are always on the lookout for innovative businesses across sectors and there are more funding opportunities now than ever before.
Want to meet industry leaders like the experts in this article? Come to our Next Round Investment Conference, on 15 November 2017 at 12:30 p.m., at the NatWest HQ in London. Get your tickets here: http://bit.ly/2yT5KEJ
Thank you to these experts for their participation:
Goncalo de Vasconcelos, Co-founder and CEO at SyndicateRoom
Joel Perlman, Co-founder and Chief Strategy Officer at OakNorth
Vasco Nemitz, Managing Partner at AIS Group Germany
Oliver Woolley, Co-founder and CEO at Envestors
Bill Morrow, Co-founder and CEO at Angels Den
Eyal Malinger, Investment Director at Beringea
Xavier Ballester, Director at Angel Investment Network
Tom Horbye, Senior Campaign Development Associate at Seedrs
Andrew Adcock, Chief Marketing Officer at Crowd for Angels