Entrepreneurs with ambitions to accelerate the growth of their businesses may find they need to climb a funding 'ladder' to achieve success.
Start-ups generally get on the first rung thanks to pre-seed or seed funding in the shape of a founder's savings, investment or gifts from friends and family, government grants, crowdfunding or perhaps backing from a specialist angel investor.
While these sources are quick and relatively low in risk, they are limited, so to expand further your next move may be to attract investment by selling a slice of your company to a venture capital (VC) firm. As your business grows, so does the finance available if you continue to climb the funding ladder that is better known as series A, series B and series C round funding.
Plan your funding strategy
Before embarking on such a funding journey, Dr Anthony Thomson, Chief Business Officer for business growth advisors Elephants Child, says there are some critical factors to consider: “Your ownership of the company will be diluted as you move through the rounds, so it's important to have your funding strategy, right through to profitability and exit, worked out from the start. Calculate your required funding, the commercial milestones that will support it and a capitalisation table showing valuation and your shareholding post-funding."
The type of investor you choose is a key decision too, says Dr Thomson. “It’s not just about the money – do they have the know-how to help you build the business and the connections to help open doors.”
Develop your product and hire key people
So, how much money is involved at each funding round and what should it be used for? According to Dr Thomson, series A funding can be anything from £2m to £5m. Depending on your company and its circumstances, such investment could be used on product development, hiring key staff, securing strategic customers and increasing revenue.
He adds: “While you might still be outsourcing some company functions – like an interim financial director – the people generating the core intellectual property, like the product or technology development team, should definitely be in-house staff. That way, it’s clear that anything they develop belongs to the company."
New products, new markets
Series B funding can be in the region of £5m to £50m, says Dr Thomson, and for some companies it can be the last round before you reach profitability or at least the point of breaking even. “The exception would be some of the really huge disrupters, like Tesla or Uber for example, with a long runway to profit,” adds Dr Thomson, “or those operating in sectors where adoption cycles mean it takes longer to get volume; for example, health, automotive and aerospace.”
Money raised in this round is really about expanding your business, whether that be into new products, sectors or geographical expansion. This would also be the stage at which most company functions should be brought in-house, the management bulked up, with more staff hired and your people becoming more specialised in what they do. You might also spend on refreshing your brand and increasing marketing.
At the series C funding round, your company is very much a profitable business and expanding rapidly. Investment could be put to use moving into new markets, such as Asia/Pacific or loftier global expansion. Says Dr Thomson: “At this stage you likely have successful, proven products, so the only product development needed might be something regional – to meet local certification, for example.
“Most of your spending would be on infrastructure and people – hiring staff or relocating existing staff to set-up new locations, securing office and factory space and possibly acquiring a local firm as a 'beachhead'. Costs involved with setting up a legal entity to operate in new geographies must be considered too.”
Wherever you are on your business journey it’s important to understand your ultimate goal and the funding rounds you will need to get you there. While it can sometimes be uncomfortable selling a slice of your business, if you get the deals right, angels and venture capitalists will bring both the money and expertise to get you to a successful and highly profitable exit.