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Module 5 - Funding & investment

5. How much should you raise and when

There is no straight answer to answer that and it will vary dramatically depending on the type of business in question and the different stages of the business. We thought it’d be useful to show the investment journeys of a couple of businesses.

Business 1: Brand making snacks with crickets

  • Personal funds: three co-founders each invest €5000 of own savings to put together a basic concept consisting of prototype snacks made at home and initial branding ideas with freelance designers. This MVP and initial brand is used for the next stage of fundraising.
  • Grant funding: 3 months later, the business obtains grant funding from a local social enterprise incubator and receives €10,000. This is used to fund further product and brand development.
  • Crowdfunding campaign: 6 months after their initial personal investment, the founders decide to raise their next chunk of capital through a rewards-based crowdfunding to start building a community. They raise €25,000 offering pre-sale of their bars. They use the money to conduct their first proper manufacturing run with a co-packer. They use the snacks made in this run to gain first customers and for their next fundraise.
  • Angel investors round 1: a year later, having won their first customers and proven sales on a small scale, the founders decide to raise a first round of angel investment to take their business to the next stage. They raise €160,000 and the funds to grow their team and on marketing to increase brand recognition.
  • Angel investors round 2: 19 months after round 1, having built traction with two major retailers and substantially grown their revenue and sales pipeline, the founders decide to raise a second round of angel investment (partly from existing investors, partly from new ones). They raise €400,000 and spend the money of new product development, further building the team, and refining their branding and marketing. This helps their business reach thousands of outlets and reach breakeven (the point where total revenues equal total expenses).

Business 2: Food tech company that creates solution to minimise water and pesticide use on traditional farms

  • Personal funds: Two co-founders use personal funds to finance themselves whilst they develop a business plan and an investor pitch deck. They subsequently secure their first round of funding.
  • Angel investors round 1: 8 months after their initial idea, the company successfully raises €250,000 for product development, feasibility studies and to pilot their technology on two separate farms.
    In exchange, they give away 20% of the company, valuing their business at €1,250,000 post-money
    (see the financial jargon lexicon for more on this).
  • Equity crowdfunding: another 8 months later, confident with the progress they’re making and seeing the potential benefit of crowdfunding, the founders decide to run an equity campaign raising an additional €600,000 in return for 30% of the company. This dilutes both the founders and angel investors. The funding is used to further develop the technology and bring the solution to market to a number of farms. Through contacts built during the campaign, they’re also introduced to one of the largest agri-tech businesses in the world.
  • Debt: a year later, the founders realise they need a bit more cash before their next substantial fundraise whilst in discussion with venture capital funds, so they issue a convertible note for existing investors to act as bridging loan. This money acts as a “bridge” between two funding rounds. The investors who loan the money will get a discount when this is converted into equity when the next funding round is completed.
  • Venture capital: 17 months later, wow ready to scale, the company raises €1.5 million from a strategic venture capital partner with expertise in the sector. They give away a further 25% of the business diluting all existing shareholders. This venture capital puts a board member on and enables the business to have the resources to truly scale.

It’s useful to ask yourself a few questions when deciding how much to raise:

  • What will we use this money for specifically?
  • What do we want to have achieved before raising money again?
  • What do we want to prove before raising money again?
  • How much value will this fundraise add to our business?
  • What’s our plan B if things don’t go according to plan before our next fundraise?

Top tips from entrepreneurs raising investment

“In the early days, be super scrappy in how you build your business. Make sacrifices. Be prepared not to take a salary, be prepared to hustle and sort of find a way. You’re going to learn a lot by doing that. Once you raise money, expectations start. Before you raise money, it’s your game. Then it’s not a question of how I can get as much as I can… Raise enough money so you can have enough headspace to reach a bunch of milestones. Find investors you align with.” 

-Marc Zornes, Co-Founder at Winnow Solutions

“Funding can be very complex. You don’t want to give up too much equity, but you want to be able to build your business. You want to build debt into it, but you need to be able to service that debt with sales. It all depends on your product and service… We’re a very capex heavy business, we had to spend millions before having a product, so that influences your funding strategy/model. Once you start generating revenue, and you’ve got management accounts and have actual customers and have revenue, you can’t sell dreams and rainbows to investors anymore. You’re based in reality. When you’re not revenue generating, you’re selling the dream – it’s much easier. That affects your funding strategy. If you can, raise as much as you can from the right investor with the right investment style with the right ethos but make sure they’re coming on that journey with you.”

-Steve Dring, Co-Founder at Growing Underground

“Take what you need in order to be able to deliver – product-to-market speed is critical so if outside capital is available, it becomes fundamental to the success of the business.”

-Arturo, Co-Founder at Clara Foods

“I would recommend researching sources of non-dilutive capital early on, grant funding etc., but be specific and targeted for funds that apply to your business and approach start up competitions with some caution; they can be a great source of publicity, some funding and a bit of a dopamine hit but I would be disciplined about the time spent on applications, pitches etc. Regarding venture capital funding, again be specific about the investors you target, food and agriculture is a niche sector, but growing, with a number of funds dedicated specifically to technologies in these areas. A warm intro is a hundred times better than a cold email
(…). Fundraising is exhausting and the advice given is to focus on it entirely while doing it. I personally have always found this difficult as CEO of an early-stage company but do set goals of i.e. 50 meetings in one month and try to schedule a few a day in a concentrated period.”

-Abi Ramanan, CEO & Co-Founder of Impact Vision