London VC’s expect 1 out of 5 of their investments to succeed whereas US VCs expect 1 in 15 of their investments to succeed – straight from the mouth of a London VC. With these stats, it sounds like it’s the streets of San Francisco that are paved with gold…
I am currently fundraising for my startup, TableCrowd, and due to the stage we’re at we’re talking to VC’s as well as some big gun private investors and deep-pocketed angel conglomerates. However, for projects where seed funding is required, at the level typically provided by angels, I think entrepreneurs should consider circumventing the formality of this step.
What does an entrepreneur face during an angel round? Hitting the circuit and pitching to the angel networks, a multitude of follow-up meetings, then a mountain of due diligence per prospective investor. In a nutshell, time away from the business when it desperately needs you. It can be a vicious circle: you need angel funding to progress, but focusing on the raise can make it harder to hit the milestones you have promised to those angels. It can, at times, feel counter productive to the vision for your project.
The alternative? Looking closer to home. In the current economic climate, anyone can be an angel, not just people that officially assume this title and have invested previously. Entrepreneurs should look around their contacts and networks with fresh eyes, to fill the round with a number of smaller private investors rather than official angels. You should approach everyone as a possible investor, not just the people you have known to invest.
So what options does your network currently have for their spare cash? They could save it, but it’s not looking that rosy for people that have traditionally been savers. UK interest rates have been low since 2007 and they seem set to stay where they are for the foreseeable future. Coupled with this, there is a public expectation that inflation is set to increase, making saving long term even less attractive. They could invest it in the markets, if they know how? However, your average Joe doesn’t know enough about stocks, shares and the markets to invest and even if he did, the markets are volatile and investments can be very high risk.
Comparatively to the options outlined above, making an equity investment into a growing business could start to look more appealing, especially where there is already a relationship with you, the founder. Helpfully, it is likely that London’s booming startup industry and the possibility of making an investment in a startup is already on their radar, due to the growing number of crowd funding platforms and celebrity investors.
Two generous tax relief schemes introduced by the Government – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) have made investing in startup businesses even more appealing and an easier sell for you. There’s no getting round the fact that an investment of this nature carries risk, but this risk is substantially reduced by these schemes. I won’t set out a detailed assessment of them here, but in short, a qualifying 50% band taxpayer is only exposed for 75% of their investment, due to income tax relief.
Under both schemes, there is a facility to reduce exposure even further if the investor has a capital gains tax liability as this can be deferred under EIS or completely waived under SEIS (until the end of 2014). On the upside, investors can sell their shares free of capital gains tax if they hold them for at least three years. The Government gets a hearty pat on the back for both schemes – and they can be a deal clincher for you when seeking investment, so you should make sure you know the rules and that your business is eligible to benefit.
I’m not suggesting that raising money from people you know rather than from known angels will be easy. The people you approach will be careful, they will assess the risk and carry out due diligence, but the process might well be lighter and faster. You will know them already and they are likely to know about your business already. These are big hurdles cleared at the outset. You just need to sell them into your dream and in my experience, you could have the funding you need from the most surprising of sources and lot more quickly than you expected.