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Executive and professional education

 

Experts discuss how startup ventures can avoid fundraising pitfalls at Enterprise Tuesday event at Cambridge Judge Business School.

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Entrepreneurship has always been about trial and error, so learning from mistakes is a key part of the journey – and raising funds for new ventures is often an obstacle course that trips up even the most skilful.

Avoiding common fundraising mistakes was a central theme of a recent edition of the Enterprise Tuesday series at Cambridge Judge Business School, entitled “What they wished they knew when they were raising money”.

“I’ve seen every single mistake that can be done – although people are very creative and they keep on surprising me,” said Hanadi Jabado, Executive Director of the Entrepreneurship Centre at Cambridge Judge, who moderated the discussion.

The panellists at the event were John Lee, Chief Financial Officer of software company DisplayLink, who has helped raise funds for many startups; Iris Good, chair of corporate strategy firm Good Relations India, which helps many UK companies in India; and Edward Griffiths, partner at international law firm DLA Piper, who advises on many deals involving new ventures.

Here in edited form are a few tips from the panellists on what startups should know when raising funds in order to minimise mistakes:

Be realistic in your ambitions

John Lee: “Remember that the amount you raise determines the size of the business you need to become. If you’re going to raise £100 million, on the basis that investors expect to get a 10-times exit, your business needs to be worth £1 billion in five years’ time. And that means that if you sell on a four-times revenue model, your revenues have to be £250 million – so the more you raise, the harder it is to get the return for the investors.”

Edward Griffiths: “If you’re about to give people numbers, do not disappoint. Be careful about your ambition. If you’re saying it is today ‘this’, don’t let those numbers go, because there’s nothing that knocks investors’ confidence more than the numbers failing as you’re going to make an investment. So, yes, you can project out and think that it’s going to be great and fine, but at the moment in time that you slip on numbers or find something wrong, that’s the moment in time when you’re going to have an expensive conversation or a deal-ending conversation.”

Have an easy-to-follow narrative

Iris Good: “First of all make sure that you have a clear and brief story to tell, that what you’re telling your investors is clear to them. Remember that your investors, nearly all of them, will not be experts in your field. They made some money, they want to invest, but they don’t know much about the field that you are experts in. If you come and throw a lot of jargon words, it will not buy them in. You need to distil and refine your story. If you start with a big story that they don’t understand, they will usually not invest.”

Know your true market size

John Lee: “Be totally obsessive about who your customer is, what your product is, and the market you’re serving. The number of times I hear somebody say that “our addressable market is £10 billion”, but actually when you get into that it’s actually much smaller than that. If I’m supplying, say, sheep food to a rare breeds farm, it’s no good if I’m saying the farming market in the UK is £500 billion because actually the addressable market for feed for Scottish rare breed sheep may only be £200,000. Be very, very articulate and very, very disciplined to make sure you understand the market you’re serving.”

Find ambassadors

Iris Good: “Get endorsement. Because if they don’t know, they’re not sure about your product, the best thing for investors is to hear that somebody that they do appreciate really appreciates your product. It sounds very simple, but so few companies do that. You’ve got to have your strategy and you’ve got to look for opportunities all the time. You chew it and you digest it and you dream it 24/7, and you find these contacts.”

Practice good housekeeping

Edward Griffiths: “When you’re raising money, simple things matter. Clarity of IP ownership is key – the diligence in these things is like an audit, literally ticking through everybody who’s touched anything because they want to know there are no holes in this. The other thing that costs money is not having a simple capital structure. Who are your shareholders? When we see early-stage companies with very broad-based shareholder bases, that is a logistical nightmare, it doesn’t make a great deal of sense. People look at it and say I can’t invest in this because I can’t get rid of this tail of moms, dads, uncles, third cousins, that sort of thing. Have something called a ‘drag’ – which provides that if I want to sell out I can force everyone to sell out.”

Don’t let the perfect be the enemy of the good

John Lee: “We find here in Cambridge quite often that engineers are perfectionists, they always want to get the best product to market first. Always get the minimally viable product out to market first, the product you can get away with, and then improve after. Don’t waste time trying to get a perfect product – it will just take you too long, and you end up finding you don’t meet your objectives.”