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Qi3 Accelerator Insight

Five Ways to Finance Your Business

Financing a business is a tough decision making process – each entrepreneur’s circumstances are different, and equity fundraising is certainly not the best solution for everybody. Here are five common ways that start-ups finance their businesses:

1) Friends, family and fools

Despite the seeming disparagement, these people are far more likely to lend you money on easy terms and to be more forgiving if things go wrong.

My advice on this is a) do it with a proper legal agreement and b) visualise how your relationships will change if you lose all of the money. I speak from experience.

2) Get a hand-out (in old days from a charity, nowadays a grant)

If you qualify for a grant – for example, a product development grant from the Technology Strategy Board, or R&D tax credits from HMRC – then congratulations!

Grants are non-dilutive benefits and all that you have to do is to process a little paperwork and claim the money, after which you are responsible to nobody.

3) Angel investors

Angels are investing their own money.

Some (like me) see it as a diversification of assets into high risk, potentially high reward ventures. I also do it because it is fun – I like helping the companies in which I invest, and feel that I’m doing good by investing in manufacturing / engineering companies and supporting entrepreneurs whom I respect.

Some angels want to roll up their sleeves and have a lot of involvement with the business, whereas others just want to write a cheque and see you return it with a healthy profit on exit in a few years. Some are very wealthy, investing large six or seven figure sums in each business; the average individual investment is £25,000-40,000.

So to raise say £500,000, angels naturally form syndicates, where one (or several, like Qi3 Accelerator) leads the investment, undertaking the evaluation, due diligence and legal work on behalf of the group. But the principle is still the same – we are investing our own money and it hurts if we lose it.

Certainly if you are looking for help to develop the business as well as pure cash, angels are the best route. I have recently been involved in investment rounds ranging from £10,000 to £2.3m led by angels.

4) Crowdsourcing

Pretty new, but may be effective for some businesses.

My cautions would be on the legality of the arrangements (in some cases) and whether this route will raise you enough cash. On the other hand, it puts you – as the entrepreneur – in a stronger position if you have many small investors rather than a few larger equity-holders breathing down your neck all the time.

5. Venture Capital (VC)

By this I mean investment management houses that manage funds comprising other people’s money. During early stages of small business investment, these are mainly public funds (UK or EU). There are also a few remaining VCs who manage Venture Capital Trusts (VCTs) and other investment groups. VCs are generally interested in investing sums of £2m+ in companies although there are exceptions.

VCs generally seek tougher terms than angels, as the investment manager needs to monitor his investees. He needs to be accountable to his investment house for governance and generate management fees both from the investors and the investee companies.

So how should you decide which route to follow?  Of course you may well need different sources of finance as the business develops, but I’d suggest that you start by considering (a) the amount of money you need, (b) the strings attached by lenders / investors and (c) the support that investors can offer in addition to raw cash.  My starting point would generally be to model ‘bootstrapping’ the company with revenue from sales and income from grants / collaborative R&D partnerships before considering loans or equity finance.  As investors, we are always keen to help leverage these sources of finance, so our interests are well aligned.

Does your heart rule your head when you invest?

The Qi3 Accelerator investment evaluation process is (in)famously rigorous. We follow a defined series of steps in order to evaluate businesses against a series of criteria.  My head tells me that’s all good and rational, a business-like approach.  But experience tells me that many angels rely much more heavily on ‘gut feel’ to reach investment decisions. So what happens when the head and heart feel differently, and which should you follow?

It is true that the argument of using your head is strong and logical, and we should make our business decisions based on research and evidence. NESTA states that every investment should have three critical factors in place: 1) a great business idea 2) a great management team 3) great mentors. If any one of those is missing, then business angels would be better off encouraging the start-up entrepreneur to seek to improve their idea, management team or mentors before parting with cash.

But emotion will always be part of investing especially when facing convincing applicants. Recent statistics from SEI (http://www.seic.com/enUS/about/4895.htm) showed that more than two-thirds (68%) of high-net-worth individuals surveyed have let their emotions get in the way of making the best investment decisions. Additionally, Dr. Gerd Gigerenzer, social psychologist and the director of the Max Planck Institute of Human Development in Berlin, writes (http://paultrout.com/leadership/trusting-your-gut-feelings/), “… gut feelings are based on simple rules of thumb, what we psychologists term ‘heuristics.’ These advantage of certain capacities of the brain that have come down to us through time, experience and evolution, when people use their instincts, they are heeding these cues and ignoring other unnecessary information.” In other words, he argues that gut feelings help us to sense when something is afoot without having actual proof that it is.

Perhaps Dr. Gigerenzer has a point here. Looking at the statistics (http://f3fundit.com/blog/what-makes-a-good-business-angel-investment/) , approximately 80% of angel-invested businesses fail. However, if one observes angel investor activity from individuals who have been actively investing in the industry, then the failure rate drops to about 60%.

So head or heart? And before you ask – yes it’s a live case for me.

Five principles of career happiness

People always ask me why I’m so relentlessly active and enthusiastic about my work. In all of my businesses, it actually comes down to some simple principles:

1) Do great stuff

Some people think that technology business is pure rationality and number crunching. I disagree. My industrial career has taught me that customers don’t just buy a product, they also invest trust in the salesperson and engineers as the embodiment of their company’s values. They purchase a product alongside building relationships with their suppliers to get the best product and service long term. After all, even in business to business (B2B), we are transacting with one another as human beings. Doing great work for customers results in repeated business and referrals, so I always seek a five star review. On top of that, happy customers are a great source of personal satisfaction and motivation.

2) Have fun at work

Life is too short. Work is about doing stuff that you are interested in and passionate about. My whole career has been about finding great technologies, working out how they should be marketed and then selling the hell out of them.  I love finding that ‘bite point’ where great technology finds a ‘must have’ market proposition.  I’ve always been keen on the integration of real engineering technology and business, creating products and services that benefit customers tangibly. That’s the reason I started Qi3 and Qi3 Accelerator – to help businesses discover new ways of doing things and co-create something new and exciting.

3) Build a good team

A successful business is built from skilled, experienced and enthusiastic people who derive pleasure from working in teams and have respect for the variety of skills and personalities required to build a business. This allows us to react faster to market needs and to understand the people dynamics.  Being keen on teams has helped me to coach companies better too.

4) Make a living

Honest business is good business. We provide access to hands-on skills and expertise at an affordable price, allowing businesses to rapidly see the real impact of our input and effort. Over the years, Qi3 has established a great reputation as a result.  But don’t be scared of making a reasonable profit – it’s the return on your investment and there to reinvest in the future.

5) Go home and enjoy

From all the things I’ve said above, you might think that I only care about work. And some of you have 4am emails from me to seemingly prove it.  But that infamous work-life balance is equally important. I enjoy many evenings at the theatre, or dining with friends and family. I’m also well known for my partiality to a glass of decent wine! After all, it’s only reasonable to enjoy the benefits of all that hard work and share my leisure time with my family and friends, who nurture me in so many other ways.

Seeds for the Future

The success of the Bootcamp was a milestone for Qi3 Accelerator and showed that Qi3 Accelerator can do a lot more to bring talents together and help start-up businesses. As a result, after holding meetings with a number of close associates, we’ve decided to step up and provide seed equity financing of up to £400, 000 for Seed Enterprise Investment Scheme (SEIS)-eligible businesses. Individual companies may apply for investment up to £150,000 through this call for proposals. We believe that this is a great opportunity for us to give some hands-on support for suitable businesses and to help businesses develop into profitable ventures.

The initial evaluation process is simple – The Syndicate would like to have a summary of up to four pages – including references – with the following headings: Summary, Management Team, Market Overview, Products and Services, Business & Revenue Model, Growth Strategy, Competition, Intellectual Property, Support required from Qi3 Accelerator, Exit Timetable, Financials and Funding Requirement (present and anticipated future), Existing investment, Ownership Structure and Contact Details. More information can be found on our website. Our areas of interest are technology-based manufacturing, engineering businesses, supply sectors such as cleantech, healthcare/ life sciences, aerospace, space and engineering industry and security. Whilst The Qi3 Accelerator Syndicate encourages seed stage companies in other areas to apply, it will not consider biotech, FMCG and e-businesses.

As a very broad indication, The Qi3 Accelerator Syndicate typically expects to offer investment of around £50,000 – £150,000 for 15-30% of company equity. So it is vital that applicants make the investment proposition clear in the initial application (how much money you are seeking, how you feel we can help you beyond cash and how much equity you are offering in return for this cash and support).

Initial applications will be considered within a few days of submission. We look forward to hearing from you.

For further information, please visit our website or contact Nathan Hill.

Isotera CEO talks about his fundraising experience

Marc Ottolini, the CEO of Isotera, has recently produced a feature article with Cabume regarding experiences in fundraising. Reading the article reminded me of the daily challenges that start-up companies have to face. The challenges are never simple, and Marc’s experiences give us a fascinating insight into the difficulties of fundraising. Read the article to learn his perspectives.

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