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.