7 Essentials that unlock Start-up equity investment

Different people like different things. Take cakes for example. Would you choose chocolate or fruit cake? It’s worth remembering this when it comes to raising start-up equity investment. Different investors like different opportunities for different reasons.

Image of a cage dollar bill with the words 7 Essentials that unlock Startup equity investment

For some investors it’s all about sector – what’s hot, disruptive or growing fast? For others it’s about the stage of development. Some investors like to get in early, others like to wait till the business is scaling. For many investors the management team behind the business really matters. The point is, you can’t predict the individual preferences and foibles of investors.

Communicate what is on offer

You can’t predict, but you can communicate clearly what is on offer. The quicker an investor understands what is on offer, the quicker they can decide if they will back you, or not. Raising investment is time consuming. It’s a distraction from your real job of growing your business. You don’t want to waste time talking to people who are not interested in what you have to offer – so make sure you are clear and succinct in your communication. Give people the information they need to make the right choice for them.

The ingredients of success

Most cakes have four essential ingredients (flour, butter, sugar and eggs). Similarly, most investors taste test the appeal of a start-up equity investment against four ingredients:

  1. Opportunity – what is the problem the business solves for its customers? How big is the market? Are there many competitors in the sector?
  2. Traction – investors don’t back hunches or ideas. They want evidence that demonstrates how effectively the business develops products and recruits and monetises customers. They want to know how established the product range and marketing strategy are?
  3. Team – who is behind the business? What motivates them? Do they have the skills, experience and relationships to deliver a successful business?
  4. Deal – how much investment does the business need and what equity is offered in exchange for that investment? Is that realistic and fair?

7 Essential Ingredients

When you dig into the detail of what investors look for in order to make a start-up equity investment, there are 7 Essential ingredients investors look for to unlock start-up equity investment:

1. The problem your business solves for customers

Customers don’t buy products. They buy solutions to problems they face. What problem does your business solve for its customers? How does it do this better than anyone else?

2. The market size and targeting approach

This is usually addressed in terms of the Total Addressable Market (TAM), the Serviceable Available Market (SAM) and the Serviceable Obtainable Market (SOM).

The Total Addressable Market is the number of people who could buy your product. This show investors the ultimate size of the market and is usually demonstrated with industry sector research reports.

The Serviceable Available Market draws a picture of the customer segments your business can reach given your geographic/financial/product constraints.

The Serviceable Obtainable Market – or your target market – identifies the customer segments you intend to target first. Given all businesses have limits to their marketing budget you have to focus somewhere, even if you will extend to other segments at a later date. Different customer segments have different needs and most start-ups choose to focus their attention on customers who have the strongest need and ability to pay.

3. Monetising the market and growing revenue over time

How does your start-up make money? Investors expect to see clear revenue streams. Ideally more than one as this de-risks the opportunity. A detailed 3 year (or sometime 5 year) forecast should tell the story of your start-up’s growth trajectory in numbers.  

4. Traction

Traction provides evidence – or proof, if you will – of what the business has achieved so far. Traction is an equation . It isn’t something that happens over night. It is an iterative process which showcases not just your start-up’s ability to deliver, but that you have the grit and determination to perform over the long term. Running a start-up is a marathon not a sprint!

5. Brilliant team

However good your business strategy and executional plan, it is people who make things happen. Does the team behind your start-up have the skills, experience and relationships to deliver the strategic drivers that will make your start-up thrive?

6. Ask

Cash is king, right? Investors need to understand how much money your business needs to succeed. They are not interested only in what X or Y costs, but that you have also thought about how much time it will take you to achieve key milestones in your start-ups development. There is nothing worse than the cash running out before you have reached a critical milestone that unlocks the next stage of start-up equity investment.

7. Valuation and term sheet

If all the elements of your start-up strategy are in place, then investors will assess the deal. What are you offering in exchange for investment? Does that taste good or not? Most founders focus on valuation (the percentage of equity (shares) they are offering in exchange for a cash investment), but the detail in the term sheet is important too. What type of shares are on offer? When do they vest? Who will sit on the board to represent shareholders? It all influences the appeal of the deal.

Investors are busy – the 7 Essentials help you communicate quickly & succinctly

It’s important to recognise investors are busy people. They are short on time and have lots to distract them from looking at your opportunity. The 7 Essentials give investors the information they need but you must also be succinct in conveying this. Go on for too long and a potential investor will drift away.  No one like stale cake!

Everything you prepare needs to be short, to the point and focused on giving investors the information they need. Nothing more and nothing less! It’s a good exercise to convey the 7 Essentials on just one page of A4. One page can usually be read in 5 minutes which is how long most investors take to make up their mind whether this is the cake for them, or not!

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To find out if your start-up is ready to attract investors, take the Start-up Investment Scorecard

Funding Accelerator is designed to speed up the process of preparing your start-up for equity investment.

Startup Meetup: Why traction speaks louder than words when raising equity investment

Investors look for “traction” when deciding whether or not to back a business – but what does that actually mean?

This interactive meetup brings together startup founders for a practical discussion on what investors mean by traction, and to share experiences of how best to evidence this to get investors “on the hook”. Together we’ll:

  • Uncover why “traction” speaks louder than words for investors
  • Discover the three elements which deliver “traction”
  • Explore ways in which you can evidence “traction” to quickly hook investors

This facilitated meetup will start with presented content to spark a conversation but will include time for you to ask specific questions and to share your experiences too. You will also have the opportunity to hear about resources that make it quicker and easier to raise investment.

We meet via Zoom – with cameras and microphones on – to share as a community. This is about you getting the answers you need – and offering support to those on a similar journey to you. Bring your questions, be generous in sharing your experience.

A Zoom login will be provided after you register and in a reminder email before the event. Places are limited to ensure a good interactive experience. Please book early to avoid disappointment and, if you can’t attend at the last minute, please let us know so that your place can be offered to someone else.

Reserve your free place here

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Facilitated by Hatty Fawcett

Hatty Fawcett, founder of Focused for Business, has been raising money for businesses and projects since she was eight. She has worked in three startups and raised £250,000 for her previous business (a marketplace). In addition to raising investment herself, Hatty managed some of the investments Kelly Hoppen made when Kelly was a “Dragon” on the TV show “Dragons Den”, making business angel investments. This gives Hatty a unique perspective on raising investment, with practical experience of having raised investment herself as a founder, but also understanding what angel investors look for when they back a business.

Hatty is on a mission to make it quicker and easier for founders to raise early-stage investment. Her vision is to see a level playing field when it comes to raising investment. In the last 12 months, Hatty has raised over £1 million for her clients, with individuals raising between £10K and £350K.

Hatty is a Regional Manager for Angels Den, a Talent Spotter for The Startup Funding Club (SFC) and works with all the main crowdfunding platforms. She is committed to giving founders the clarity, connections and confidence to attract a range of investment offers so that they choose the right offer for their situation.

What people say about Hatty

“Hatty’s meetup was like a one-stop shop for all the information I needed . Succinct, clear and full of ideas.”

“The Meetup was a very beneficial experience. It made me rethink our whole launch and fundraising strategy.”

“By the end of the Meetup everyone was contributing and helping each other. It was energising and motivating.”

“Hatty brings clarity and focus to the complexities surrounding raising investment.”

“It was useful to interact with the others and it’s reassuring to hear others’ stories of fundraising.”

“Hatty is a fountain of wisdom when it comes to raising investment.”

“Hatty’s tone and enthusiasm are very motivating.”

If the Eventbrite booking checkout does not appear, you can book your ticket direct on Eventbrite

The article on how to value your start-up that got 14K views

About 18 months ago, Crowdcube asked me to write an article on how to value your start-up, which I duly did. It was published and I pretty much forgot all about it.

Imagine my surprise then, when CrowdCube dropped me a note to say the article had had 14,000 views. They were impressed (I think “awesome” was the exact phrase!), and so was I.

Stepping aside from self-congratulatory indulgence, it’s perhaps not as surprising as you might think. Valuing your start-up or early stage business is one of the most important elements of any investment raise – be that crowdfunding, angel investment or a private equity round. Setting the wrong valuation will deter potential investors just as sure as setting the right valuation can attract them.

What’s more, as a young business, knowing how to value your start-up is one of the trickiest elements of an investment round to get right. If start-ups had the stable and predictable revenues of more established businesses, there are lots of clever accounting and corporate finance tools that can be used, but none of these apply when you have fledgling or fast-changing revenue streams.

So how do you value a start-up?

Here’s 6 key pointers to get you started

Be pragmatic

Recognise that too high a valuation will close conversations with potential investors even before they have begun. Conversely,  setting a valuation too low may mean you sell more equity than you actually need to. Start by identifying a realistic range within which your valuation will gain consideration from investors.

Do your research

Conduct some bench-marking research to identify other businesses at a similar stage to yours that have recently raised investment. What was their valuation? Crowdfunding platforms can be very helpful when collecting benchmark data since the valuation is more public than for private deals. Use the data to develop an upper and lower range for valuation. 

Evidence your valuation

Identify “proof points” – things you have already achieved – which substantiate your valuation. The best proof points are things that create value in your business such as having developed a product that customers are raving about, having found a proven route for attracting new customers and being able to show revenues.

Listen to feedback

Valuing start-ups is not an exact science. It’s more of a negotiation. Start by testing your valuation with trusted advisers, fellow founders and friendly investors. Listen to their feedback and use that to get a feel of whether your valuation is in the right ball park – or not!

Be ready to negotiate

Even when you have arrived at a sensible starting point for valuing your business, don’t just expect investors to accept this. You can be pretty sure they will want to negotiate. Be ready with tangible evidence (of other similar investment raises, of your proof points, etc) to justify your valuation. Don’t be afraid to ask potential investors to justify how they arrived at their (different) valuation – be that higher or lower. Use all your negotiation skills to reach agreement

Secure a lead investor(s)

It is easier to settle on a valuation as “definitive” once you have a lead investor(s) ready to invest at that valuation. Once you have secured this, be sure to mention to other potential investors that you have a lead investor(s) backing the round at this valuation. (For tips on how to secure a lead investor, read “How to find cornerstone investors”)

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If you would like further help in developing the right valuation for your business, Hatty Fawcett runs an online masterclass “How to create a business valuation that gets your start-up funded”  which offers a down to earth, step-by-step approach to creating a business valuation for start-ups and early-stage businesses. Find out more about this masterclass

How do you value a startup – in the real world?

The internet is littered with stories of astounding startup valuations, achieved within just a few years of a company’s birth. I think my favourite in recent months is the aptly named Improbable, a UK tech simulation company, which raised $502 million (£390 million) in a funding round in May 2017 at a valuation of over $1 billion, making Improbable a unicorn (a business valued at $1 billion or more). The company was just 5 years old.

Are such valuations the stuff of dreams, make-believe and fairy stories? (Surely that choice of the name “unicorn” isn’t used without irony!) How do you value a startup in the real world?

“A startup needs money. It makes the dream come true.”

Now, don’t get me wrong. I expect a founder to be bullish and full of optimism for their business. No one is going to invest in a business you’re not excited about. The issue here is that investment for early stage businesses is vital. It is literally the lifeblood. It is what enables you to build your prototype, test routes to market, build market understanding and provide the funds for growth. A startup needs money. It makes the dream come true.

“A “deluded valuation” can close doors before you’ve even had a chance to say ‘Hello'”

But, a “deluded valuation” can close doors before you’ve even had a chance to say “Hello, I’m Rumpelstiltskin”. Why would you close doors before you’ve even started a conversation?

Established businesses have it easy. When you’ve got predictable revenues there are numerous ways to assess and measure business value. (If you ever find yourself having trouble sleeping, take a look at this Wikipedia article listing ways to value a business. Startups and early-stage businesses are anything but predictable – they may not even have revenue. In such circumstances, the only business valuation that matters is when two parties agree to buy and sell.

“The only business valuation that matters is when two parties agree to buy and sell.”

But how do you get to that point? Where do you start? How do you evidence your valuation? How do you negotiate to reach agreement?

Startup valuation is a negotiation – but not one that exists in the founder’s head. One that is grounded in fact, displays careful planning and contains a dose of realism.

There is nothing more likely to cause a potential investor to walk away than a business valuation justified in the following was:

“I’ve looked on crowdfunding sites and another company that’s not as good as ours is valued at more”

“That’s how it’s done “in the Valley””

Instead, real world valuation starts with:

  • Facts – that demonstrate what you have achieved in the business and that there really is a market that is willing to buy what you offer
  • Financial forecasting – not “finger in the air” stuff, but grounded spreadsheets that demonstrate a founder’s understanding of market drivers, costs and diversified revenue streams
  • Strong team – the right people with the skills and experience to make the financial forecast a reality
  • Credible exit – which demonstrates not just an attractive return for investors on paper, but a believable route to selling shares so that the return can be realised.

Then, it’s a conversation between grown-ups – exploring assumptions, plans and options. The length of that conversation being tempered by the speed at which the business needs the investment!

By Hatty Fawcett, Focused For Business

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If you want to learn more about practical business valuation for startups, sign up for the live and interactive online masterclass “How to create a business valuation that gets your startup funded.”

You might also like “How to value your startup: A brief, practical guide.”

“Speaking the language of investors made it quicker to find investment” says Jason Kirk of Kirk & Kirk

Jason Kirk co-founder of Kirk and Kirk, an upmarket eye-wear brand, is a very credible founder and business owner. He and his business partner Karen built and sold a successful business prior to starting Kirk and Kirk, they both have over 20 years’ experience in their industry, their latest business has made good progress and they have raised investment before (for their first business). You might think that they would find it a breeze to raise investment. And yet, when they were looking to raise investment for Kirk and Kirk they sought external support and advice. Hatty Fawcett of Focused For Business caught up with Jason to find out why.


Hatty: You decided to raise investment from business angels rather than any other source, why was that?

Jason: We didn’t need a huge amount of money, about £150,000. We were eligible for SEIS (Seed Entreprise Investment Scheme) which I knew would make us appealing to angel investors so it felt like a logical place to start. I was also interested to see what sort of angel we might attract and whether they might bring additional value to the business in the form of contacts or skills, as well as their money.

I’d also decided against going to the banks because they tend to be slow and expensive. The amount of work involved measured against the amount of support you end up with from the banks is, at best, frustrating.

Hatty: You had raised investment before, for your previous business, so people might assume you knew what was required. Why did you decide to get external support in preparing for investment?

“I really want to ensure I was speaking investors’ language. I know how time consuming raising investment can be. I wanted to get it right first time and avoid going backwards and forwards with investors and spending too much time on it.”

Jason: Yes. I’d raised investment before but this was a different business. Enlisting the help of someone who knows how to tailor a document to the needs of a specific audience is very time efficient and should lead to better results. I really want to ensure I was speaking investors’ language. I know how time consuming raising investment can be. I wanted to get it right first time and avoid going backwards and forwards with investors and spending too much time on it. Raising investment can be a big distraction from the day-to-day running of your business if you’re not careful!

Hatty: You’re right. Raising investment is a full-time job – on top of the full-time job of running your business! Raising investment gets an awful lot easier when you have a lead investor, someone willing to back your business and say why they are doing so. How did you go about finding a lead investor?

Jason: I didn’t have a huge network of investors so I admit it was daunting knowing where to start! But having worked on what I need to say to investors with you, it gave me confidence to go out and start talking to people. I remember you encouraged me to talk to everyone! Telling them about the business, what we had achieved and what we wanted to do next. I spoke to so many people I began to get board of the sound of my own voice!

“It’s definitely easier to attract other investors once you have a lead investor.”

But it paid off, one of the people I spoke to – looking for their feedback, I wasn’t actually asking for investment – was an active angel investor and he liked what we were doing. He agreed to be our lead investor. It’s definitely easier to attract other investors once you have a lead investor.

Hatty: That’s very true. A lead investor really gets things moving. I know it worked for you and, with the support of your lead investor, you were able to complete the investment round. Thinking back on the process of raising investment, what advice would you offer to anyone preparing for investment today?

Jason: I’d use an experienced pro to help you prepare the documents and figures you need because it saves a great deal of time and makes your investment look more attractive to potential investors.

Hatty: Have there been any surprising outcomes from raising investment?

Jason: The investment has allowed us to make significant progress in a relatively short time frame. In fact, we’ve achieved the milestones we set and are ready for our next round of investment!

Jason worked with Hatty Fawcett of Focused For Business to prepare for investment, with the specific objective of developing a strong summary of the investment opportunity (in the form of a one page executive summary) and a credible business valuation.

If you would like help preparing for investment, book a free funding clinic with Hatty Fawcett or attend a live and interactive, online masterclass that gives you the tools to prepare yourself for investment.

Giving you the tools to raise investment: Online masterclasses for start-ups, founders and early stage businesses

This online masterclasses series is designed to give startups the tools and information they need to prepare for investment in a focused, actionable way:

How to write an executive summary that attracts investors
Learn to create an executive summary for business angels or crowdfunding investors that really sells your investment opportunity.
Find out more and book a place

How to create a business valuation that gets your start-up funded
“Real world” business valuation for start-ups and early stage businesses looking to raise angels investment or crowdfunding.
Find out more and book a place

How to find investors and move them from “Doubters” to “Shareholders”
How to find, warm up and close deals with business angels and crowdfunding investors.
Details coming soon

How to pitch your start-up to raise investment
Develop the range of different pitches you will need when raising angel investment or crowdfunding.
Details coming soon