1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

Seed funding and venture capital - mind the gap.

Discussion in 'Business & Tax Advice' started by nuf-ced, Nov 3, 2015.

  1. nuf-ced

    nuf-ced Administrator Staff Member Moderator Jr. VIP

    Joined:
    Sep 27, 2012
    Messages:
    427
    Likes Received:
    305
    Taken from an interview i recently gave as part of the new BHW AMA sessions coming soon.

    Q. Seed funding and venture capital, do they match or is there a gap between the two?

    A. There is a gap in finding money. In fact when you look at what it takes to start a business, there is three things in principle you need, a good idea, a great team and most importantly money. But finding the money is the most difficult part of it all. Most of us when we start our new business adventures use our own money, or ask friends and family.
    Even if we manage to gather £20,000 there is still a big gap between the money we actually need, effectively we need over £50,000 to talk to any venture capitals businesses, as they are only interested in investing or lending to a company which has a million or two.
    This gap is very critical in helping early business ventures getting started and growing fast. It has been recognised for some time, that is why government and both national and local, have been very keen to develop seed funds, to bridge the gap between the personal funds, grants, friends and family money, which may have accumulated to £20,000, £30,000 or £40,000. Then to fill that gap up to million pounds, then a company can seek venture capital funds.

    Q. In that case, gathering your friends and family’s money, is there a right and wrong way to go about this relationship, do you have the idea first or the money first?

    A. You need a good idea, a good effective team with the right balance of skills and experience which will satisfy investors, which will show them that you are able to grow your business effectively. If you are asking other people for their money, you need to give them confidence that you will invest and spend that money wisely. People are looking for experience and the right skill set.

    Q. What about Incentive and scale? Because those are the two other ingredients which makes a successful adventure.

    A. There are many early stage adventures which stay small, that’s normally not a problem as for many people their businesses are a hobby or lifestyle. Most premiers / prime ministers of first world economies are interested in seeing companies which have the potential for growth. Companies which are going to grow fast and be effectively, which results in building the wealth in the economy, allowing more jobs to be created and for everyone in the society to get better. Growth companies are a critical requirement.

    Q. So it is important to write your strategic plan and showing that curve going up?

    A. Certainty you want to have that, but you do want that grounded in truth and anyone who is going to invest in you will look for that evidence, instead of graphs based on hope.

    Q. What about patents? Everyone seems to get an idea and then rushes out to get patents. Even before they can prove it works, or go out to get venture capital, they MUST get patents. Are patents such a necessity as people think?

    A. It is not essential, but from an investor’s point of view, they are looking for a way to sustain the value of the business. They are looking for businesses which are profitable, if they are very profitable the likelihood is that people will try and copy them, patents gives you that protection. Investors like patents but a patent isn’t a panacea, it does not guarantee your business will be successful, it doesn’t stop other people copying you, it just allows you to sue them if they do and suing them will cost a lot of money. In my book they are useful and expensive, to prevent being taken over by competitors is to keep innovating, keep developing your product faster than your competitor’s, making sure your product better and charge a good margin for them.

    Q. The other thing people talk about after setting up successful companies. Is the fact that you initially you grab money from anywhere that it is being offered. Then perhaps your realise you grabbed the wrong venture capitalist and got the wrong people on your side, how do you know who should invest in you?
    A. There are many sources of finance for businesses, many people start thinking that no one will want to invest in their business. As well as investors grant funding is very useful to get started. In the past you needed an overdraft funding with your bank, which could be very tricky to get now. Then when it comes to investment, sources of finance, yourself, friends and family, business angels, seed funds, venture capital firms. But what you want is smart money, money rom people which understand you’re your business and your industry sector, provide you with advice and maybe links with customers and partners.
    Smart money is what you need to think when you go looking for funds. Many entrepreneurs will want to grab the money and go off and do what they want it. Whereas smart money the investors will be there sat alongside you making sure you what they think are the right things, which is slightly less comfortable, but it is better to have smart money than dumb money.

    Q. As we learn more and there is more research about the match between start-ups, seed funding, venture capitalists. That we will get model which will point start-ups in the right direction in the future, a proper business model for start-ups?
    A. I think one of the key problems at the very early stages at the establishment of a business, the risks are much higher than they are later on. So you are asking the people at an early stage of investment, to take high risks, they therefore expect high returns. As the business evolves and get bigger the investments will be larger the risks will be lower. This means the people on the investment side, tend to be the people who make their investments later in the business and that encourages all investors to move in that direction. This results in the investment gap that we have between 50,000 – million which is difficult to fill. If you are a commercial investors you want to be in the million, five million, 10 million pound investment area.

    Q. A tip from your experience of success and failure?

    The most important is to build a great team, you must have the best team around you. We all spend all lot of time building our products talking to our customers, we should all spend a lot more time building our teams and making sure you have the right people working for you.
    Secondly, focus. Do not try to be all things to all men, work out what you are really best at and where your product really beats competition and focus on that. Next thing, make sure you are clear on the USPs are that your product delivers, why is your product better than the competitions? Make sure you build upon that.
    Finally charge at a good margin, if your businesses is profitable you are in a better position to invest into market development, product development, business development and you will build a business much more rapidly that way instead of fighting with tiny margins.
    A. And lesson from failure?
    Do not be under-capitalised. Make sure you get enough money into your business at the beginning, so you do not spend all your life chasing after more money from your investors.
     
    • Thanks Thanks x 17
  2. Asif WILSON Khan

    Asif WILSON Khan Executive VIP Jr. VIP

    Joined:
    Nov 10, 2012
    Messages:
    11,478
    Likes Received:
    32,427
    Gender:
    Male
    Occupation:
    Fun Lovin' Criminal
    Location:
    London
    Home Page:
    Definitely the type of content I would like to see more of on BHW

    Any further tips on identifying the right VC's and choosing a compatible fit for your business?
    I should imagine that if somebody is offering you a cash injection the temptation is to grab it with both hands.
     
    • Thanks Thanks x 2
  3. Asif WILSON Khan

    Asif WILSON Khan Executive VIP Jr. VIP

    Joined:
    Nov 10, 2012
    Messages:
    11,478
    Likes Received:
    32,427
    Gender:
    Male
    Occupation:
    Fun Lovin' Criminal
    Location:
    London
    Home Page:
    • Thanks Thanks x 2
  4. nuf-ced

    nuf-ced Administrator Staff Member Moderator Jr. VIP

    Joined:
    Sep 27, 2012
    Messages:
    427
    Likes Received:
    305
    Thanks W130SN

    Finding the right VC's that's the battle! The most active guys are probably the full time VC's BUT, and this is a personal point. I prefer to work with VC's that have exited something they have built that's relevant to the industry you're in - it's the old smart money v's dump money problem. Dumb money will probably pay more but Smart money will, usually, be more entrepreneurial and help build your business. Meeting ay investor in real life is key. Ideally attend a local (to them) event that is industry relevant and see how many contacts they have, it becomes fairly clear very quickly if they are the type of person you want to work with.

    Finally - if you're jumping the first person who offers you money you started this too late unless you're in a very very niche industry there are always people around that want to invest if your product is good enough. If you only get 1 offer of 100 offers ask them for a week to think about it, take 48 hours out from your everyday life, book into a hotel / meeting space / somewhere no one knows you and get some head space. Then bang through a business plan focussing on this person / group's investment requirements.

    You've got this far - now it's down to your gut.

     
  5. acrenc1989

    acrenc1989 Registered Member

    Joined:
    Aug 27, 2014
    Messages:
    86
    Likes Received:
    7
    no withdrow option
     
  6. christianbed

    christianbed Jr. VIP Jr. VIP

    Joined:
    Aug 17, 2011
    Messages:
    1,402
    Likes Received:
    918
    Location:
    alert("Make Money")
    Home Page:
    Good stuff, indeed. Are there plans to include a bio section in the AMAs?

    I'm sorry to say that I don't know much about your expertise in this area, and I think it might be helpful to explain to the community why a particular person was chosen to talk about a topic.

    I may have missed something, but are you a VC, entrepreneur, or middleman/agent to one of those parties?
     
  7. C4blows

    C4blows Newbie

    Joined:
    Dec 3, 2015
    Messages:
    15
    Likes Received:
    2
    Something I will be needing to be more informative on soon, thanks
     
  8. Mr Kewl

    Mr Kewl Newbie

    Joined:
    Apr 30, 2012
    Messages:
    11
    Likes Received:
    0
    This was really informative, and something out of the box. Great!
     
  9. TheNumbersGuy

    TheNumbersGuy Jr. VIP Jr. VIP

    Joined:
    Jul 14, 2016
    Messages:
    148
    Likes Received:
    20
    Gender:
    Male
    Occupation:
    IM Fluent Accountant
    Location:
    Vancouver, Canada
    Interesting post nuf-ced, just want to add on the profit margin & accounting side of things. When you are evaluating your margins make sure that you are evaluating your cost as accurately as possible, what I mean by this is that if you hire someone to work on a product for you, you should have a portion of their salary/wages (unless of course this person would be working for you regardless - this would be a fixed cost) are being allocated to the cost of the product.


    For example, If I was to create a network of sites I would need to pay for the domain & hosting say, $11.00 (variable cost - it is dependent on the number of websites created), a portion of the workers expense (say the worker can create content on 2 sites an hour, and you pay them $14.00/hour, you would allocate $7.00 to your variable-cost/website).



    Essentially your cost per site would be:

    Domain & Hosting: $11.00
    Content: $7.00
    Total/site: $18.00

    And lets say we sell each site for $50.00.

    Your Profit Margin would be:

    Sell Price: $50.00
    Variable Costs: 18.00
    Profit Margin: 32.00
    Profit Margin % - 64%

    Definitions:
    Fixed Cost - An expense which you would have regardless of the product you would be creating.
    Variable Cost - A cost associated with the production of each unit made, it is dependent on the number of units made.

    Hope this helps.
     
  10. janetankute

    janetankute Newbie

    Joined:
    Jun 13, 2016
    Messages:
    1
    Likes Received:
    0
    Gender:
    Female
    Home Page:
    Tks for your posting, Something I will be needing to be more informative on soon, if you are unable to find the topic you are interested in please access here http://factoflife.net/science-and-technology/science to learn more
     
  11. gling2

    gling2 BANNED BANNED

    Joined:
    Jan 15, 2016
    Messages:
    80
    Likes Received:
    9
    Thanks for this info. I have bookmarked the page!!