The biggest lessons we learned raising a £500k seed round

Rob Imonikhe, Co-founder at www.idealflatmate.co.uk

We had an original idea, a good product, thousands of users and even some national press coverage. But as things were in March of this year, all of it was going to mean nothing soon. Our user base was growing and people liked the concept. But we did not yet generate revenue, and within three months our account would be empty.

Fast forward a few months and the business has raised £500k to drive growth (plus it’s now started generating some revenue). Tom and I learned a few things on this journey and we wanted to share some with you. Whether you are considering how to raise the cash to get your own dream off the ground, or are just curious about the process, here are some of the lessons we learned raising our seed round.

Awful picture of Tom Gatzen (L) and myself (R)

1 – Now is a great time to do it

Key takeaways: If there was ever a time to raise seed money, it’s now. And make sure you use EIS and SEIS.

Now is a brilliant time to raise investment, particularly in the UK. Firstly, no one can get a decent return on their savings at the moment, so anyone with extra cash is looking for places to put their money and see it grow. Believe it or not, your mad idea for a startup might end up contributing to someone else’s retirement fund.

Secondly, there are great government tax incentives in the UK for investing in startups. They are the Enterprise Investor Scheme (EIS) and the Seed Enterprise Investor Scheme (SEIS). Look up these schemes, apply for advanced assurance that your startup will qualify, and make sure you understand the impact they have on investors. EIS and SEIS offer up to 50% of the amount investors put in to your business as income tax relief. Also, future losses (if the venture fails) can be written off against tax.

In our experience the most valuable advisors often don’t ask for the most in return.

2 – Get the right advice (ideally early on)

Key takeaway: High calibre people are often willing to help, so it’s worth asking. Most of our advisors have come from our extended network, but some are completely new connections.

We leaned on friends and mentors with experience to help us plug our own skills gaps, including successful entrepreneurs, financial analysts and professional investors. If you are starting out for the first time, getting some advice during a fundraising round is critical for two main reasons:

  1. It makes it less likely you are going to make mistakes
  2. If you speak to someone who has done it before, it makes the whole process less scary

You will need to do your own due-diligence and filtering to work out which advice to follow. But we could not have successfully carried out the round without the support of our mentors and friends. Also, in our experience the most valuable advisors often don’t ask for the most in return.

As a boring but important point, one person to involve early, if you are raising a serious sum, is a lawyer. Ours worked on the basis of only sending their invoice after the round was closed, so we could engage them straight away. We still wish we had brought them on earlier and would have avoided a couple of mistakes this way.

3 – Set a timeline (and aim before you shoot)

Key takeaway: Setting a timeline will not just help you order your approach, it will help psychologically break down the task ahead in to more manageable chunks.

One of our advisors (now our Chairman) helped us break down the task of fundraising in to clear steps, setting a timeline for the round. This began with guiding us in developing financial projections, followed by scrutinising our business plan, deciding who to approach and setting the lower/upper limits for investment. We even had a couple of“practice pitch” sessions.

On reflection this simple action of setting a timeline had a big impact. We had a clear roadmap of what we were doing. We didn’t rush to approach investors (well, in reality we did a little bit, although we were advised not to). And this goal-setting also allayed some of our anxiety. In the same way writing a to-do list can make you feel better when you are overburdened.

Crowdfunding is the sexiest way to raise money today. A whole industry has sprung up around it…

4 – Look to the Angels

Key takeaway: Don’t forget that their are many already successful business people out there who are open to investing in startups at very early stages.

We were too early for most VC’s so the main options for us to fund growth were friends and family, crowdfunding, and angel investors. We had already exhausted our friends and family just to start the business, so that wasn’t an option.

Crowdfunding

Crowdfunding is the sexiest way to raise money today. A whole industry has sprung up around it and we met a number of people who recommended this as the best route. But after further investigation, we realised it wasn’t right for us.

We met with individuals who were now running successful companies but had bad experiences with crowdfunding, not hitting their initial targets and suffering a PR hit as a result. When you know you need £300k or £500k to realistically give you enough runway to succeed, then crowdfunding can be risky unless you are confident you can whip up a major storm marketing the round. Also there is often more admin involved in getting your crowdfunding campaign off the ground than other fundraising routes. We are not saying that crowdfunding is not great, it is and it may well be something we turn to in the future if needed, but it wasn’t right for us at the time.

Angel Investors

Business Angels (jargon for successful entrepreneurs / business people) turned out to be the best potential backers for us. They brought a number of benefits that you don’t necessarily get with crowdfunding. They were “smart money.” Almost all of our investor meetings to date have taught us something about the market or product. Even investors who never actually operated in our sector brought significant value. We have already been connected to a number of other successful entrepreneurs, who we would not have met without our investors linking us up. Our Angels were able to move quickly, providing an injection of cash when needed. And finally, if we can show them value, some will follow us for future rounds.

5 – Valuation is approximate

Key takeaway: Do your homework and get advice on the valuation, but once you’ve settled on it, stay firm — everyone has an opinion.

Before speaking with investors, we knew that we needed a valuation. Once again we needed help and leaned on our friends. A financial analyst helped develop projections and a detailed list of assumptions. And our Chairman emphasised the importance of us knowing every line of the projections, plus the reasoning behind each of our assumptions.

To reach our valuation we consulted neutral investors and financial analysts. We talked through our projections with them, looked at relevant exit deals in the market, and considered what return our investors would expect. Eventually we reached a figure that we were confident we could defend, however we learned that particularly at seed stage, when there are so many variables, there is a lot of room for interpretation around valuations. In our first pitch, we were not laughed out of the room, so we knew we were in the right area, and we stuck to the figure through to close.

6 – Don’t get defensive

Key takeaway: Listening pays off

Sticking firm on our valuation does not mean we were inflexible to other people’s ideas during the round. We felt confident in our modelling, however we learned quickly to remain open to alternative opinions. Investors ask questions and poke holes. But the wrong way to react to this is getting defensive. By opening up to criticism or difficult questions, we actually built trust with our (then potential) investors, and even adapted some of our assumptions. This flexibility was received well.

I remember thinking it was strange […] all of the language was based around what we would do, not what we would try to do.

7 – Don’t “try” to raise

Key takeaway: There is no try

I have to give credit to my business partner Tom for engendering this self-belief, as well as our Chairman, Jonathan. Before we had spoken to any investors, or even had our valuation, we sat around a table and agreed that the round would close in two months time. I remember thinking it was strange, but all of the language was based around what we would do, not what we would try to do. This made a difference: we started to view the task as though it were actually achievable (which we didn’t honestly believe at the outset).

8 – Trust your instincts

Key takeaway: It sounds cheesy, but listen to your gut

When you are doing anything for the first time, whether it is water-skiing or fundraising, the natural reaction is to follow outside instructions / signals. However, there were times when our first instincts were right, and for whatever reason we ignored them. In a couple of meetings with potential investors, we could tell that the dynamic was not right, and we should say no / walk away. In hindsight, those hunches were right and we would have saved time and effort by listening to them.

Good luck!!!

And if you ever need a flatmate or place to live in London, check out our website! www.idealflatmate.co.uk