Fundamentals of Funding

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Getting a business off the ground is a famously difficult task. When it comes to getting some money behind it, there are many different hoops through which budding business owners must jump.

 

1: Idea

You will be the brain of the business, and funding will be calcium to its bones. The idea, however, is the heart, and without a strong heart your business will struggle to get far. Before bringing it to investors, you’ll need to develop your idea and form a watertight business plan around it. This will require your own money, and perhaps some from your trusting friends and family.

 

2: Angel/Pre-Seed

Once you’ve gathered enough funds to build a solid prototype and business plan, you can seek funds from Angel Investors (~£8500 – £400,000). These funds will go towards hiring the core team, developing a fledgling customer base and building a proof of concept and/or proof of market fit. In exchange for their investment, Angel/Pre-Seed Investors will ask for around 5%-10% equity.

 

3: Seed Round

In the seed round, you’ll be looking to attain the attention of key players and influencers in your industry. Through them, you’ll gain access to their expert knowledge and their professional networks, not to mention their funds. This attention is won through a consistent track record backed up by a detailed business plan. 

 

4: Series A, B, C+

These funding stages bring in progressively larger investments. Beginning with Series A, the first Venture Capitalist (VC) firms will offer between £1.5m – £12.5m for between 10% – 50% of the business. These funds will be put towards optimising the product or service and the business model.

Series B brings in more VC firms with the addition of Private Equity (PE) firms, inviting far larger sums than previous rounds. By now, the business model should be firmly set and out of the development stage, with the new investments instead going towards funding the marketing and sales departments.

Series C and beyond sees further expansion in your business’ investors. By now, you will be seeing investments from Hedge Funds, Investment Banks, and other institutions. These investments can continue to scale with your business, going above and beyond £100m. Once at this stage, you should always be searching for the next step of expansion, whether that be growing to new geographies or venturing into new or larger markets.

 

5: IPO

One of the most prominent options open to businesses who have reached this stage is an Initial Public Offering, or IPO. This is where a company that was hitherto exclusively privately held begins to offer its stock on the public market. As this is a figurative ‘ceiling’ when it comes to new investments, going public is often seen as an exit strategy for a business’ founders.

 

6: Other Exit Strategies

In addition to going public, founders have a wealth of options when it comes to exit strategies once they feel they’ve maximised their profit.

Other choices include selling the company – either in part or entirely – to another, a Management Buy-Out (MBO) in which the company’s senior management purchases the founders’ controlling shares, or full liquidation (the selling of all the business’ assets and the dissolution of the company), though this is typically reserved for failing businesses.

In most cases, IPO is seen as the most desirable exit strategy for a business, but it often depends on the business itself and its founders’ intentions following their exit.

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