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So, you’ve raised the Start-Up Capital...What’s next?

Jonathan Gold

30 Oct 2013

Firstly, congratulations are in order! I'm sure that if you have raised your seed capital, ordinarily a tantalising couple of hundred thousand pounds sterling if you’re in the UK, you will be busy spending it and burning away the midnight oil…. as well as the cash.

Start-up capital and seed money has become easier to access in the USA and UK over the last 5 to 10 years; partly due to the intervention of a great number of schemes and early stage funds. I run one, theNorth East Angel Fund, in my day job at Rivers Capital Partners.

The research firm CB Insights has predicted that, in the USA alone, over 1000 seed-funded starts will die through lack of next round capital. Start-ups created in the USA in 2012 rose to 1700, which was up 64% on 2011. This is against a backdrop of only a 2% drop in the availability of Series A finance at the same time.

What troubles me though, is the growing and oft-foolish assumption that all of this increased buzz of start-up activity will lead to a growth in the number of businesses (note, businesses not start-ups) that will succeed in raising capital beyond start-up and initial growth stages.

I hear complaints, both here and in the US, from entrepreneurs that, as they have grown a customer or enquiry base of a few thousand users and have been active for two years or so, they have somewhat of an unfettered right to the few million cash they would like for further business development. The problem is that the mainstream venture capital community functions in the same entrenched way that they always have and the fundamentals that they require are still far beyond what most of these businesses can provide.

The system is undoubtedly working; there is proper Series A capital (totalling a few million and upwards) around. Yet, what there appears to be significantly greater competition for is caused by more start-ups than the industry has seen for years, perhaps amassing an amount virtually unseen in recent history.

As an almost inevitable result, we will see more failures than ever before, as the test from the venture capital world hasn’t changed. The only change of note is the growth in alternative funding streams - although most do not yet offer (albeit, not easily) a few million pounds in funding at a time. Of course, the increase in Angels and the advent of Crowd-Funding will undeniably contribute too (a “Business Angel” being a fairly fitting term for a rich individual investor prepared to take extreme risks). Both Angels and Crowd-Funding are, without doubt, of fundamental benefit to the industry, but both are working most effectively at the medium-level start-up; turning it into a proper business. Let’s not be misconstrued, this is welcome news for many; it’s simply that the tests applied and depth of knowledge of these kinds of investors are somewhat lower than true "Series A" venture capital investors.

So, where do you go from here? Firstly, you have to know going in what you really want; because you can’t have it both ways. If you have the seed capital safely stashed in the bank and are working at using it up to build upon your squeaky clean product or service, ensure that you spend time early on your funding strategy.

If you decide to go into high impact venture-backed entrepreneurship; you’re trying to build a business that’s going to grow to be a large-scale success. When you reach that point, you’re not going to be your own boss for long. Whereas, on the other side of the fence, a small business entrepreneur wants salary security and to be their own boss, with paramount control from inception to smaller-scale success.

Therefore, you really need to ask yourself which world you’re trying to be part of. Are you trying to be a business owner who’s well respected in the community, or is the inception of a new Google or Twitter in your sights? If it’s not, and do take advice as your own enthusiasm has a habit of blinding you, then no need to despair. Principally, be realistic with the cash you need from now, and the slope on your growth cure. The most successful entrepreneurs, whatever their business size, find it tough to form a stringent plan for every contingency, or predicting finances with incredible precision. The fundamental is to be realistic, act on your honest predictions, learn from what you find, and act again, until the process, and growth of your business, is perfected. Decide which side of the fence you’re on early, get your figures clear and be honest with yourself; otherwise you’ll waste a lot of precious time with the wrong investor.


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