What do you think your start-up needs to make it work? Assuming you have a great business idea, the right team in place and a product you are ready to unleash on an unsuspecting public, chances are you’ll be looking for 3 things:
1. Cash: You’ve quit the day job, touched friends and family for a few thousand, been to see the bank manager, bent over and lowered your trousers, and now you have just about enough to launch. But your projections are telling you a 40k cash injection at this stage will make the difference between producing 100 of your product, or 1,000. How confident are you? Do you stick or twist?
2. Advice: How hard can a funding round be? Your product is a sure fire winner. Crowded marketplace, you say, barriers to entry. SWOT analysis? You’ll be telling me I need an accountant and a lawyer next! Be honest with yourself; if you have spent 3 years in your garden shed developing the next gaming phenomenon, created a fun app with your mates that you are sure will catch on, or are taking a leap into the unknown by quitting your job with only your old contacts list for company, then you are going to need all the help and guidance you can get.
3. Support: When the going gets tough, who’s going to keep you from burying your head in the sand? We all need people behind us when we start something new. We might not like to admit it (we can do everything on our own, right?) but words of encouragement, a groundswell of support, the idea that you are “doing it for the fans” is a seductive one.
Ok, so bearing the above in mind, let’s examine which is the best route to market for you and your business. Angel Investor / VC or Crowdfunding platform?
• Experience: Angel investors have been there, done that, and supplied the seed funding for the printed T-shirt. They are there because they have, in one way or another, made it. They know what it takes to succeed in business.
• Expertise: Angel investors have been successful in the past because they have worked extremely hard to gain the knowledge and experience necessary. They wouldn’t be in the position they are now without shedding bucketloads of blood, sweat, and tears, and most probably, cash. They made the mistakes and scaled the heights, and they want you to join them in the winner’s enclosure.
• Contacts: It’s not what you know, it’s who you know. You might think your design for a new kind of can-opener is unsurpassable, its graphene and silicon combination handle surely makes it best in class? Angels, on the other hand, know that in the supermarket, eye level is buy level, and product placement will, in reality, be the key to your success. And they just happen to know a guy who knows the guy who decides how the shelves are stacked at Sainsbury’s. Let them handle it.
Angel investor Cons
• They want how much? An Angel investor is not a philanthropist, they are a profit hunter. They will want as much equity as they can get, or at least as much as their rival angels are getting, or they won’t be able to show their faces down at the country club! I jest, but be prepared for some touch negotiations. Healthy, but tough. You may not be able to dictate terms to an Angel investor.
• So long, sucker! So your product turns out to be a slow burner, but, you argue, in 18 months it will be flying off the shelves! They enjoy investing and spending time helping companies grow, but they enjoy it even more when their investment makes them a decent profit. All Angel investors have an exit strategy. Make sure you know as much about it as possible, because if they pull out suddenly, you could be left feeling as exposed as a man swimming in a leopard skin mankini when the tide goes out.
• Just the 2 of us: You may be lucky enough to meet an investor who is sympathetic to your funding requirements, and fascinated by your company, a kindred spirit. This is great news, but remember this relationship will be in place for years. Be clear from the outset how the investor sees your product, and what his growth expectations are. If you don’t do this there is every chance the relationship may become strained. If you have just one or 2 investors on board, it may be hard for you to do things your way and any disagreements could seriously impact your business. Things might begin to feel strangely like that desk job you quit because you wanted to run your own business.
• Do it your way: entrepreneurs tend to be idiosyncratic people (that’s why they have such innovative ideas), and crowdfunding is therefore the perfect platform to launch your slightly off-the-wall product. If you can capture the public’s imagination it could create a snowball funding effect, as more and more people, encouraged by their friends or by what they are reading or hearing, come on board. Of equal importance, however, may be the fact that you have complete control over how to use the funding raised; no troublesome board members asking difficult questions. You are free to grow the business your way.
• Incentivise the public: One of the great features of crowdfunding is the ability it gives you to create a sliding scale of opportunities for backers to become involved with the business. For example, if a backer donates £10, they receive a company fridge magnet, £100, they can come to your warehouse and see just exactly how you mix the flavours of your super-food-soup range, and for £1,000 they can join you at your exclusive launch party at the Box nightclub, Piccadilly, and enjoy midget wrestling, acrobatics and free Veuve Cliquot champagne all night!
• Increase your contacts / client base for free: Crowdfunding represents free publicity, and is a great way to bring new customers on board who are genuinely supportive of your product. Your backers have lent you money presumably because they like your product and think it will be successful, so all of a sudden you have a ready-made client base, marketing team, and distribution channel. Not many Angel investors can get you that kind of exposure so quickly.
• Too many cooks? Spoil the broth. If you have 100 backers, that is potentially 100 people who feel they have a hold on you and your business. They might email you with questions, or feel they have a say in the direction you wish to take the Company. They may also, being amateur rather professional investors, be quite naïve about the return on investment, or exactly what it is they are funding in the first place. This could lead to the initial goodwill you have generated evaporating quickly.
• How does it look to your clients: If you are selling into a multi-national company, for example, who would you rather have on board? An angel with 20 years’ experience at said multi-national, who rose to Director level and still has many friends within the company, or 150 enthusiastic, but not business savvy backers from a retired folk’s investor club in Stockport? It goes without saying you’d prefer the experience, unless you’re prepared to jump on the 6.15 to Manchester every Friday and listen to 25 octogenarians tell you about how the local dentistry market is going downhill. An extreme example, of course, but an important point.
• Just can’t get enough: In the end, it may come down to this. How much can you raise? Your Kickstarter campaign may be eloquent, it may engage the audience and it may bring the community together, all of which is great and to be commended. But can you pull in the funds you really need to get the business off the ground? I’ve said it before, there’s a reason we have professional investors, and it’s not just because of greed and avarice. It’s because sometimes they are the people who can get things done for you, in their particular area, the best.
So, Crowdfunding or Angel, Angel or Crowdfunding. You decide, and tell us why you did what you did?