Getting in on the Ground Floor
How the market for early stage venture funding has changed
Getting in on the Ground Floor…
It is understandable why raising £100,000, £1,000,000 or even anything up to £10,000,000 in investment is more achievable for businesses than those aiming to raise smaller amounts. It comes down to risk. Generally the earlier, the riskier.
It’s also down to available channels. Banks aren’t loaning, angels tend to get involved at higher investment thresholds, vulture capitalists at even higher levels… and so on. Look around and you’ll notice countless ‘pay to pitch’ models — all pretty shady and parasitic if you ask me. “That’ll be £1,000 upfront, plus a 5% success fee”. Not for me thank you. If the organisation’s network is strong enough then they should make their cut purely through successful investments. Otherwise it’s a tax on hope. Maybe it works for some businesses?
Coming out of University in 2009/10, armed with an idea and bucket-loads of enthusiasm, I was shot down in my mission for funding, time and time again. Angels laughed when I revealed the amount I sought, stating it wouldn’t cover the legal costs of the investment they would start with. Quite simply, I needed £10,000 to get my product prototyped — despite the fact I had a Canadian buyer lined up, willing to manufacture, license and export to 78 countries.
Here were my options back then — in order of logic:
Get a job and pay for it myself — or as one successful-but-chippy entrepreneur suggested ‘Get a job in McDonalds? — urgggh. I really wanted to concentrate on my business, not flip burgers and I worked out that I’d need to spend 6 months in a job I didn’t like, by which time my contact might get cold feet and I’d be 20kg heavier from all the fast food. Surely it would be more confidence-inspiring — and indeed better for the business — if I could find someone to believe in me enough to share some risk? After all, I wasn’t asking for much in the way of funding — and I had intent.
What about Friends, Family & Fools (the 3 ‘F’s, as they say) — quite simply, my family wanted me to raise the funding myself. They would support me with a roof over my head and as much food and drink as I needed (wanted even) and much-needed emotional and business support but that was where their investment in me had to stop. If I wanted funding I should go out and find it. That is, in his (and my) opinion, part of the startup experience — going cap in hand.
Ask the bank — “sorry, not interested.”
Ask VCs — “ha, get real.”
Ask angels — “sorry, you need to be looking for more money”
Pay to pitch — Pay 1/10 of the money I was looking to raise — no thanks!
Prince’s Trust — Useless (though other people I know and admire have apparently received support)
Regional Development Agencies — Useless and chippy — so much so, most have been shut down.
Things have changed since 2009. Now there’s Kickstarter, Crowdcube and Seedrs — to name a few. These sites act as online equity brokers — providing a platform for businesses to crowd-source their investment requirement. They also have the added benefit of building a base of brand advocates and early adopters. Good job guys and well done! Some of the projects I’ve funded include StoreMates, Neardesk, Evocha and Compare & Share. Despite @Nero’s (Milo Yiannopoulos) vicious but none-the-less interesting stance on these platforms I like to think my investments (albeit small) aren’t just about generating return on investment but encouraging and fostering new ideas.
Anyway, back to 2010. I needed to fill the gap — early stage projects and businesses (like mine) still needed financing. So I decided to create a resource for entrepreneurs called Ground Floor Ventures. Its aim was simple; I wanted to help encourage entrepreneurship and the resulting valuable technology created by determined time-rich, cash-poor innovators. I also wanted to make a little cash so I could fund my prototype — not a bad idea I thought (better than the McDonalds option). Opening night, cold February evening, we held the first Ground Floor Ventures event. The queue to get in stretched down the street — a total of 300 guests, most of them looking for new opportunities to back. Ten businesses looking for various levels of funding attended the Dragons Den-style show. We organised the format so ‘sponsors’ would act as judges (Dragons) by steering the show and asking grilling questions. Sponsors paid for early information on attending startups and, of course, the awareness generated by the event for their business.
Most of the attending startups were looking for approximately £10k with varying levels of equity on offer. A few months after the show and one of the businesses went on to raise £1m in startup funding — ah, the one that got away! Several other projects got funded and made new connections — it wasn’t all about cash, some teams were looking for advisors and alternative routes to market. The event was a showcase for early-stage businesses.
And then something interesting happened. We realised that all our focus was on helping entrepreneurs get pitch-ready but missed out on something else. The majority of guests were looking for opportunities to get involved in. Maybe it was the local hotel manager who fancied getting involved in mobile app development. Perhaps a local entrepreneur who was keen on publishing and wanted to back new magazines. We had a great guitar builder who was pitching for £10k — this is in a town where 6 out of 8 music shops closed during the recession — not a bad opportunity, or as we would say, ‘pivot’. The fact was we realised that there are a lot of ‘unlikely investors’. That is, they don’t have to be sharp-dressed, ‘been around the block’ finance guys. We found a lot of people were interested in being part of early-stage opportunities. And by early stage, we are talking about projects as much as businesses.
Sure investing can be high risk but we aren’t necessarily talking about large funding requirements — for me it was about introducing people who tend to miss out on early-stage opportunities with, er, early stage opportunities. I’d here like to recognise the concept of ‘nano-investors’ — one step beneath ‘micro-investors’. Investors funding short-term projects and experiments as well as businesses.
Navil Ravikant of AngelList says “Once, an entrepreneur would go to a venture capitalist for an initial five-million-dollar funding round—money that was necessary for hardware costs, software costs, marketing, distribution, customer service, sales, and so on. Now there are online alternatives. “In 2005, the whole thing exploded,” Ravikant told me. “Hardware? No, now you just put it on Amazon or Rackspace. Software? It’s all open-source. Distribution? It’s the App Store, it’s Facebook. Customer service? It’s Twitter—just respond to your best customers on Twitter and Get Satisfaction. Sales and marketing? It’s Google AdWords, AdSense. So the cost to build and launch a product went from five million”—his marker skidded across the whiteboard—“to one million”—more arrows—“to five hundred thousand”—he made a circle—“and it’s now to fifty thousand.” Piece by Nathan Heller
The Lean Startup methodology, evangelised by @ericreis encourages early-stage businesses to test assumptions, fail, fail quickly, fail cheap and move on. Through customer development and keeping costs down, startups can learn and grow into successful, valuable businesses.
Based on open-source availability, social media, lean methods and crowdsourcing, it has never been a better time to start a business.
There’s a collective responsibility, both respected and rewarded, for encouraging entrepreneurship and innovation — and we need to encourage the backing of ideas and concepts which have the potential to turn into valuable resources.
There are plenty more resources now for entrepreneurs looking for funding and for investors, of all levels, looking for projects. Don’t have money, that’s fine — invest your time. Do something. Create. Encourage. Support.