Everyone is familiar with the concept of new businesses going through multiple funding rounds as they reach differing levels of maturity and profitability. One of the key principles of funding rounds is that with each new round, key milestones should have been achieved and the value of the business should have been increased, ideally by a factor of 10 so that the investors benefit from the risk they take at each subsequent funding round.
That is not always achievable as start-ups don’t always turn out as one would hope, but it is recommended business owners start thinking this way from the very beginning as it will stand them in good stead for later rounds. The start-up should begin thinking about the valuation of the business at each round and what achievements are required to deliver that valuation.
It can’t be emphasised enough how much research the business owner should undertake when looking at any of the options below. The best advice is to always know your audience, know what their investment preferences are and make sure you approach the right people. You will have spent many hours on refining your pitch and you don’t want to waste that effort on someone who was never going to be interested in your business in the first place.
Below we go through some of the options for achieving your funding goals.
Friends and Family: Although friends and family might be seen as an easy way to raise funds it is recommended that you follow the same investment process that you would apply with a more professional investor. Friends and family are often investing in an idea and in the founders, they are taking the biggest risk and the valuation of the business should reflect this. A typical family and friends round would probably raise around £20-£50k with objectives such as building a prototype within three months. It is unlikely that the money will be used to pay the founder’s salary. A shareholders agreement is also a good way to ensure friends and family are protected at later stages of fundraising.
SEIS funds: There are several SEIS funds and they can be researched on the internet and approached directly. Many specialize in industry sectors. Funds normally aim to invest around close to the maximum SEIS limit per company of £150k. Most will look for this money to get a ‘minimum viable product’ live and recruit some customers to get some real feedback on the idea. Again the SEIS fund will be looking for a set of deliverables that their money will be used to deliver such as to get live and start collecting live customer KPIs.
Angels: Angels can be reached either through angel investment clubs found via Google or via a firm that specializes in helping companies raise money They typically charge around 7.5% for the service and maintain a list of people who wish to invest in the sector.
GamCrowd offers such a service and maintains a list of angel investors who are focused on the gambling industry.
An angel investor is likely to follow similar investment size and objectives as an SEIS fund and is often claiming these tax reliefs. Some angels will look to work within the business and may charge a fee in equity for their support.
Crowdfunding:Crowdfunding aims to replace the support from a single angel, incubator or SEIS fund with support and investment from the crowd. The size of the sums raised from an equity crowdfunding are normally between £50,000 and £500,000 and may follow on from a previous round of funding via a different route. The principles of outlining what the investment is going to deliver, and ensuring that successful delivery will provide a sufficient increase in value, remain true for this and all funding rounds.
• The companies and entrepreneurs with the biggest networks will be more successful.When GamCrowd completed its own funding over 75% of the investors were known to the founders. Of these around 60% had been approached before the campaign and had suggested they would invest, but the other 40% picked up on the social media campaign and decided to support the campaign.
• The start-up cannot rely on getting all of the funds from the crowdfunding platform and will probably need to have between 25% and 50% of the funding requirement lined up before the campaign starts.
• A big part of the campaign will be from smaller investors. GamCrowd received feedback from smaller investors, who liked the fact that they could support the business for a relatively small sum, and who said they felt a little intimidated by a more direct approach.
One of GamCrowd’s investors said: “If it was a private fundraising I would have expected the minimum investment to be around £5,000 and I couldn’t afford that level. However, the crowdfunding campaign made it clear that £500 was perfectly acceptable and I funded at that level.”
Incubators: An incubator should help a founder take a start-up from an idea to a fundable concept, often by a VC firm. The incubator will put a small amount of money in which is normally spent on product development and help with the business model, get some initial milestones achieved, and develop a strategy that will appeal for the next round of funding.
The incubator will try and accelerate a funding round and provide the start-up with all of the help and information that they require to get through the next few rounds.There are some famous Silicon Valley incubators such as Y Combinator. These firms normally only accept around 3% of applications and have a standard non-negotiable investment model – 7% of the company in return for around $20,000 and a lot of support.
There aren’t many specialist incubators for the gambling industry and some of the generic incubators won’t take gambling start-ups.There has been a flurry of incubator and accelerator activity in the gambling space recently, with the notable launch of the William Hill accelerator WH Labs. That will be announcing the winner of its first competition in the New Year.
Despite all of the options it is still a difficult and challenging task to raise money. However, our experience at GamCrowd is that founders make it harder for themselves by not understanding all of the options and working out what the investor is looking for.
The biggest mistake we see in business plans is not focusing on what the money raised is designed to achieve and not breaking the funding into achievable rounds which
demonstrate an increase in value each time. The second most common mistake is that the start-up is targeting a market that is too small with an idea that is easily repeatable, i.e. they aren’t demonstrating a plan to achieve market power in a sizable market.
Joelson are a Legal Firm that specialises in the gambling industry
Phil Hails Smith