Secured seed funding? Expert tips to navigate challenges to scale up at speed
Jack Clipsham, Corporate Finance Partner and Michael O’Brien, Partner, share common mistakes entrepreneurs and founders make when growing their businesses and provide essential advice to avoid pitfalls and attract investors.
First-time entrepreneurs and founders often assume that securing seed funding to grow their business is the hard part – but that’s a common and dangerous mistake. Because it’s at this point when the most arduous work begins, according to Jack who spends a considerable amount of time guiding entrepreneurs and founders through the preparation required to attract Series A funding. Jack knows what investors are looking for and how to make young businesses more appealing.
“You may have gone through the classic start-up phase, even proven a business model – this is different from a business plan and concerns how the business is going to be operated profitably – but then you have to put a strategy in place and kickstart growth,” he starts. “Scaling up is a perilously tough phase. An entrepreneur is like someone who jumps off a cliff and builds the aeroplane on the way down. When you have leapt, hopefully you have the shape of a plane and can fly. But how do you now take off and launch into the stratosphere?”
Having the wrong mindset in this phase is one of the many pitfalls to avoid, suggests Michael who works with entrepreneurs scaling up and large businesses that have been through the process. “Lots of founders reach seed level and can’t go further,” he says. “The main reasons for this are because they cannot monetise the business model and the right people are not in place.”
Mindset change required to concede control
It’s critical for an entrepreneur looking to scale up to be “far more commercially minded” in how they run their organisation, Michael posits. “You are no longer just a founder with an idea; you need a whole ecosystem of people around you, a platform, and a business,” he says. “Potentially, this means conceding a little bit of ownership and control, which is hard – no one wants to share their baby.”
Foolhardy founders find it impossible to change their approach and mindset, and they are usually the ones that, figuratively speaking, crash and burn after jumping from the cliff. “Taking on board advice and learning from more experienced people is a vital part of the scale up process, but some can’t make that switch,” says Jack.
He recalls a MedTech client who attracted £12 million in investment from a sovereign wealth fund but refused to stick to the agreed business plan – the written document that sets out the business’ objectives and the strategy to achieve them. “Immediately, he thought he was Sir Richard Branson and flew everywhere, stayed in amazing hotels, had a chauffeur-driven car, and tried to set up businesses in far too many countries,” Jack says. “It doesn’t work that way. It’s about being open, listening to others and focusing on key objectives.”
Importance of trusted advisers and partners
Michael says there are other elementary errors to sidestep. “Most of the time, people are focused on the ‘what’ they are going to achieve – for example, £100 million in revenue, or 500,000 users – and they forget about the ‘how’,” he says. “Great, you’ve secured a £10 million investment, but what will you do with that money to achieve your goals?
“That’s the gap expert advisers, and trusted partners can help narrow. At this stage of evolutionary growth, it’s all about partnerships with people who can add value to your business. Access to talent is challenging at the moment, so you need to offer more than a salary. Consider what investors can bring to the table regarding experience, contacts and resources. What doors can they open, and what can they provide in the short- and medium-term to achieve higher growth?”
It works both ways: investors have to weigh what founders will bring to the table. Michael points out KPMG’s latest Venture Pulse report, published in late July, which analysed global deals in Q2 2022 and showed venture capital investment in the first six months of the year was considerably higher than the same period last year. “However, deal numbers have gone through the floor,” he says. “Fewer deals are being done – it’s the lowest since Q2 2018 – but those that go through are at a higher value. So competition for VC or other investments is incredibly high.”
How to impress potential investors
To stand out, Jack advises founders looking for funding to follow his five-point plan to ensure they impress. “If you have 30 seconds with an investor, the number-one area to focus on is your strategy,” he says. “Be clear about what you need investment for and explain what you are prioritising. Next, show you have the necessary infrastructure in place – particularly accounting, resourcing, and technology.
“The third point is having the management and key employee resource to put the business plan in place – these people will make this happen and might include an advisory board and non-executive directors. Fourth, ensure you are not overpromising and, therefore, likely to underdeliver. But explain how the business model proves profitability – without this you won’t attract investment. Show you are focused. Finally, to put all of this together, you need funding, so be clear about how much is required and what it will be used for.”
Finally, Michael shares his enthusiasm for entrepreneurship in the capital and Tech City specifically. “The Venture Pulse report highlights that the UK, 80% of VC investment in the last quarters has been based in London,” he says. “It’s thriving right now, and the thrilling thing about Tech City is that there is a brilliant ecosystem to tap into and use.”
Michael adds: “Amazing things are happening all over the UK, but here in Tech City it feels like we are still at the heart of something very special. Because of the people and ideas, London remains a hub for supremely talented entrepreneurs. Hopefully, similarly talented advisors can support them through the process and help them scale at speed.”
If you would like to discuss practical tips for scaling up or find out more detail about maximising attractiveness to investors, get in touch.
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