Funding scale-up tech businesses

The quantity and quality of scale-up technology businesses continues to increase in Scotland with technology incubators such as ONE in Aberdeen, Codebase in Edinburgh and Stirling and universities such as Heriot Watt, Napier and Strathclyde providing a clear pathway for entrepreneurs to turn their ideas into a business.

Since leaving the world of investment banking in 2001, I’ve been working predominantly in, or alongside interesting and ambitious companies looking to grow. I’ll try to collect my thoughts about what successful fundraising looks like or maybe put myself in an entrepreneur’s shoes. Or more likely, trainers…

One of the most regular scenarios I come across is where founders try to boot-strap. Bootstrapping is building a company from the ground up with nothing but personal savings, and with luck, the cash coming in from the first sales. Quite often a founder will attempt to do this while still in employment elsewhere. But how can the company effectively scale with only a part-time founder? I think the key next step is when the founder leaves their other job and works in the new business full-time.

To do this, a founder will need some personal savings (or a Partner willing to pay the rent or mortgage for the family on their behalf!) or to have won some customers already through the minimum viable product he or she has developed. Often young companies will seek 4 or 5 customers who will help them develop the product through paid-for trials. Often a good way to get some cash in the door.

The alternative to boot-strapping which allows the founder to leave his full-time job, is trying to raise, let’s say £150,000-£250,000. With this size of fundraise, it will give the founder and early co-workers the ability to pay their own rent or mortgage and feed themselves for about 12-18 months maybe, while they see if the business can scale. I think this raise is key. I have seen countless good ideas wither away at the vine because the founders have been unable to raise this level of funding. And I have seen some terrible ideas get to scale only because they had access to funding. At the end of the day, money makes money. Most of the time…

There is undoubtedly a supply gap in the market at this level of fundraise that I wish could be filled by significant stakeholders in our economy. Perhaps a rant for another day! (look at how easily £50,000 bounce-back loans were distributed when banks were ordered to lend…)

So, how can a founder in Scotland access this kind of cash? £250,000 might take the form of 5 Angel/High Net Worth-type investors all investing £50,000 of their own money. If you don’t have wealthy friends or family, you’ll have to do your research to find out which individuals are investing these amounts in early stage technology businesses. Use Companies House to find out the names of Directors or shareholders in some of the raises which have been announced recently. You will begin to see the same names pop up in different companies. Perhaps look for individuals who have sold their businesses in the last 3-5 years.

There are hybrid alternatives to pure Angel/Seed investment, such as grant funding from the likes of Innovate UK but they will often require matched funding from the company to release grant funding. This usually means the Directors have to stump up, or you’re back looking for an investor to help you secure this grant.

So, what do you need to have in your locker to persuade investors to participate in a fundraise at this level? Investors will almost certainly require some sort of business plan before writing their cheque (bit of an old fashioned phrase now, but you catch my drift) and are unlikely to settle for teaser document.

From a finance point of view, I find myself thinking more and more that if I were to start a business tomorrow, I would do it armed with a set of 5-year projections done by a very good financial modeller. (Did I mention that we happen to have an experienced team who can do this and not charge the earth?)

Far too many times potential investors, often more familiar with numbers than the founder, may nod along during a pitch, but try to catch the founder out on their detailed numbers right at the end. Why not just remove this painful interaction on the numbers from the process by handing over the projections before the pitch? In any case, I think founders should know how many widgets they are going to try to sell each year, at what price and at what cost, don’t you?

If you have any questions or would like more information, please do not hesitate to contact Ian Marshall, Head of Tech Strategy.