Need help in figuring out how to secure investment for your startup?
Don’t worry, you’re not alone.
Finding the funding to get your startup off the ground can be a long, daunting process. And many startups understandably fall at this early hurdle. But, with the right preparation (and with a little advice from people in the know), you can drastically increase your chances of succeeding in this important step.
That’s why we jumped at the chance to sit down and have a chat about funding with the CTO of a startup we recently worked with — Alister Sneddon from Genuine Impact.
We first met Alister and his two co-founders just as they were setting out on their own funding journey. They needed an MVP app to help boost their pre-value valuation, and chance of success with crowdfunding.
A few months later and Genuine Impact has been valued at £2.94m, and has already raised over £500,000 to take their business to the next level.
Alister generously agreed to share his experience, offering insight and advice on how your startup can navigate the world of crowdfunding, venture capitalists (VCs), angel investors and investment funds.
So, without further ado, let’s see what he had to say…
Who are Genuine Impact?
Genuine Impact aspires to be the next-generation financial terminal for DIY investors.
We saw a gap in the market where everyday investors weren’t getting the same kind of quality insights and data that large institutions get. This means that everyday people are much more susceptible to noise, gut feeling and concern. One bit of bad news and everyone wants to sell their shares. Meanwhile, big investment companies don’t change their position.
So we set out to help people avoid being stuck at the whims of the daily news cycle. We help them look at the things that matter about a stock or fund in the long term. Future performance. What experts say. Are they resilient? Is it overbought or undersold? By making investment information more accessible, we empower everyday people to make better investment decisions.
Can you give us an overview of how you ended up crowdfunding for investment?
There are a number of ways for a startup to raise funds.
You could get a loan from a bank or other institution by selling debt in the company. You can approach venture capitalists, investment funds or angel investors. And you can crowdfund.
Crowdfunding was something we were all aware of, but none of us had actually done it before. We’d seen it from the outside and had even occasionally invested ourselves using either Crowdcube or Seedrs.
We explored every avenue, and there were pros and cons to every funding option. But in the end, we decided on crowdfunding. With crowdfunding, you have a month in the public eye to hit your target. If you fail, you don’t get the funds. So there’s a bit of risk there, but you can mitigate that by being prepared, and the benefits make it worthwhile.
Some of those benefits include being able to market to a larger audience, getting more exposure for the business, and being able to push for a higher valuation.
How did you prepare for crowdfunding?
One of the key things we did was join the CrowdBoost accelerator programme by Virgin StartUp, which is designed specifically for getting startups ready for crowdfunding.
We were one of a cohort of companies on the programme, which was one a day a week for six weeks.
The training was very heavily focussed on preparing documents, pitches, speeches, and getting yourself militarily drilled for how to handle certain situations. We learned about valuations, government grants, Seed Enterprise Investment Scheme (SEIS), and Enterprise Investment Scheme (EIS).
What were the biggest lessons you learned from the programme?
One of my key takeaways was looking at the phycology of crowdfunding. For example, it was invaluable to find out that you’ll probably make around 20% of your total on the final day, as people tend to hold off until the last minute and because on that last day, people’s fear of missing out (FOMO) is at its strongest.
We also learned a lot from people who had a lot of experience in every area of the funding journey. For instance, we had accountants show us what a forecast should look like for crowdfunding an early-stage business.
It was extremely eye-opening, for me personally, that the forecast was far more about having evidence than having an execution plan. In an established company you always have a detailed plan about how you’ll hit certain numbers. Whereas in a startup you have so much unknown, so investors place less value on an execution plan. We ended up in meetings with fund managers and venture capitalists where they would look at the numbers and say “how will you hit that number? Where has that number come from?”. You’d talk it through and they’d say: “ok that sounds good, of course, these numbers are pointless anyway.”
And then they’d move on. That felt a little disheartening when you’d put so much effort into those numbers, but really they’re just testing if you can support what you’re saying with evidence.
Did you get investment before going into crowdfunding?
Yes. When you go into crowdfunding you need to have at least some funding already, whether that’s from friends and family, VCs, angels or investment funds.
The reason is validation. Crowdfunding is very much a case of following the herd. If you go into it without a major investor who has assessed and critiqued your plan and you say my business is worth £5m, other people are unlikely to invest. Nobody really wants to take a chance with a business that has an empty progress bar. Having prior investment shows that someone else believes in your business. And in crowdfunding, that goes a long way.
We called them cornerstone investors. Before we went into the crowdfunding, we’d already secured some money from outside investors.
Not only did this mean that we assured potential crowd investors that we were a safer bet, it also helped to back up our valuation.
In fact, the crowdfunding platforms recommend that your entire investment should be made up of three parts: a third from major investors, a third from users (e.g. your customers, people on the mailing list), and a third from the crowd (people using the crowdfunding platform).
What do you think investors were looking for? What was the key to winning them over?
It’s important that you understand how an investor thinks. There are two main reasons why an investor invests. Emotional and logical.
Let’s say you have a company that tracks stuff around an office. As people move around it’s updated real-time, then you can find anyone in the office, despite hotdesking. An investor might look at that and think, based on their experience and knowledge of the industry, that this will be a big future business. They know that This they’ll make me a return on their investment. That would be a very logical decision.
The emotive investment might be an investor putting money into a prosthetics business, even though it might not be that profitable. They might invest despite knowing that they might not ever get their money back, because they believe in what the company does and want to see it succeed.
What an investor doesn’t want is a zombie company (basically a business that only makes enough to pay its own bills). It’s sometimes actually better for investors to invest in a company that fails — because then they at least get some tax relief through SEIS and EIS. With a zombie company, an investor might never make any money back. So an emotive investment that could fail completely is not always as bad as investing in a company that might just manage to pay its bills.
For us, we very much tapped into the logical.
We basically got told quite early on that: “you don’t have an emotive story right now.” Of course in a few years’ time we will have that story. But at this stage, at the outset of us looking for funding, our pitch had to be entirely logical.
So why did you decide to use crowdfunding as the main source of investment in Genuine Impact?
There are downsides to crowdfunding: you’re going out into the public with a hard deadline, so there’s a chance of failure. You are also less likely to get the backing of large institutions or individual investors, so you aren’t getting those benefits — such as synergies with companies they own.
However, it’s well known that crowdfunding offers a higher valuation, because the public are less likely to negotiate down your valuation. Unlike a VC, who will say “I value you at this, and if you don’t agree you won’t get the money.”
When your funding comes from the public, everyone follows one another. Because it’s harder for them to access these early-stage companies, the valuation is higher. And for the founder, this is obviously beneficial, because you retain more of the company. Ideally, with crowdfunding, you hope to give away less of your company by selling it for more.
The biggest reason we finally decided to go for crowdfunding, though, was because of the marketing benefit. We figured it costs us the same to go on a crowdfunding platform as it does to actually go to a VC or fund. So why not actually get our name out there, get us some free publicity, and give ourselves a chance to introduce ourselves to investors. As our product is actually for investors, we were marketing to the right crowd.
So why Crowdcube over other platforms such as Seedrs?
Seedrs actually position themselves as more financially savvy, whereas Crowdcube is very heavy on food and beverages companies. So Seedrs would seem like the obvious choice for a fintech startup. But in the end, we went with Crowdcube for the size of their audience.
The crowd in Crowdcube is much larger because they have so heavily invested in marketing and promotion. They have almost double the size audience as Seeders.
Ultimately, we decided it would be more beneficial to reach a broader base of potential funders/users.
Why did you decide to build the app before looking for investment?
Valuation. If you go into crowdfunding without a product, you are going to struggle to push a £1m evaluation. Our pre-money valuation on Crowdcube was £2.4m, and that was because we had an actual product.
It wasn’t just an idea. It was something you could start using and start getting benefit from. That had a massive impact on the types of people we could talk to, and the types of conversation we could have.
Getting those first users onto a new app is a hugely important step. How did you go about attracting your first users?
We did a lot of work on social media and content marketing.
We were constantly shouting about ourselves, producing whitepapers, attending events, sharing photos of events.
We attended a lot of pitch events, and not always because we needed an investor. Sometimes pitch events are great simply for raising your profile. People who were thinking of investing in us would go online to find out more about our company, and they’d see us everywhere. And that creates a great impression.
It’s a lot of work and takes time, but you would see a noticeable spike in downloads whenever we attended an event.
Is there anything you advise other startups to avoid while trying to raise investment?
Well, we actually turned down one VC investor early on. They offered us a substantial chunk of money to be the first big lead investor and to give us that validation of having a VC on board.
We were very drawn in, but the reality was that it would mean selling more of our company than we had in mind. We had a clear vision of what we wanted the company to achieve and
we didn’t want to compromise on that at such an early stage.
Very few VCs in the UK have actually run a startup themselves. And because they don’t have that experience, some of their demands and requirement just didn’t make sense to us.
On top of that, we were keen to remain as flexible and agile as possible, and some of the demands would have held us back in those regards.
Taking that money would have been the easy option, but in the long-term I think it would have harmed our company, because it wasn’t a shared vision.
My advice would be that the easy option is not always the best option. Even if it means turning down investment.
What other advice would you give to startups?
In terms of getting funding, there are lots of different ways to raise capital. The important thing that’s often forgotten is to understand why you want to raise capital the way you’re doing it.
Why do you need to get this money in? Because you’re about to experience some explosive growth? Because the business can’t sustain itself? How many more times are you going to have to get funding? All that influences what type of funding you need to get.
We had a very clear idea of why we were crowdfunding, what our long term plan was and how long the money would sustain us for. And I think that is something you really have to understand clearly, right from the start.
Another important lesson we learned came early on in the process, when someone told us something very interesting about asking friends and family to invest.
They said you need to ask friends and family to invest in your company (as long as they can afford it). On LinkedIn and in real life, you should be telling people about your business.
If you can’t do that — if you feel uncomfortable asking your mum to invest — then you’re not ready. If you truly believe your company is going to succeed, then you should not have any hesitation to ask people for money.
And finally, how did you find working with Newicon?
The fact we used Newicon was beneficial because it meant we could move very fast in terms of building up the tech and the app itself.
Using an agency might have been more expensive, but understanding your skill sets and using an existing team that knows how to work together really has its benefits. It gives you quality. It also gives flexibility.
Some investors do have concerns about startups working with agencies. These concerns are mainly around who is the creative vision behind the product, who actually owns the IP and what plan does the startup have if the agency suddenly disappears for any reason.
This obviously doesn’t mean you can’t use an agency, just that you need to be robust with your reasons for outsourcing when you’re talking to investors.
One of the best things about working with Newicon was that it was like working with a local partner. We could come into the office and sit down with the people building the product and get involved in the building of the product — which was also important to investors. Newicon were clearly passionate about the project and shared our vigour. They got why were doing it and understood why it had to work certain ways.
If you’re a startup looking for investment, then we’re sure that you will have found something helpful in this interview. If you want to know more — or want to talk about building an MVP product to help you through the funding process — then get in touch with us today.
You can find out more about Genuine Impact and download their innovative app on their website.
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