How the four S’s and a seamless agreement process can unlock scale up funding
There’s an odd paradox going on in the world of start-ups. Today, the ubiquity of mobile, cloud and virtual services has reduced many of the financial barriers entrepreneurs face when starting a business. At the same time, it has increased both the competition for, and access routes to, the investment they need to take their businesses to the next level.
With traditional lenders somewhat risk averse in reaction to the 2008 financial crash and current financial uncertainties, how can Small to Medium size Enterprises (SMEs) increase their chances of gaining vital funding in an increasingly crowded marketplace?
As a speaker at DocuSign’s recent Start of Something: Lessons in Scale event in Glasgow, I discussed this topic, and some of the main factors limiting investment options, with 30 SME owners looking to make the next step on their business journeys.
From my own experience working with businesses, charities and community interest companies considering securing external funding for growth, I have identified the top four reasons or the Four
S’s of Scale-Up Funding:
1 – The STAGE of the business
Time and again I encounter organisations that mistakenly believe they have exhausted all their funding options. Knocked back by traditional investors and having tried the three Fs of start-up capital – Friends, Family and Fools – they may think they are out of options. But they have often forgotten about the fourth – Free money.
There are numerous grants available to growing businesses, yet through lack of awareness of their availability or daunted by the often-lengthy application process involved, many organisations fail to consider them.
Yes, developing the business plan, financial projections and market validation required to qualify for the grants can be arduous for time poor entrepreneurs. But committing the time to do the work required will stand the business in good stead in the long run, helping to identify challenges and opportunities owners might otherwise have missed. And of course, they might also secure the funding they need to grow
2 – The STRUCTURE of the business
How an entrepreneur chooses to structure their business has a big impact on the funding options available to them. Of course, all businesses, unless restricted by their governing documents, can secure funding through trading, grants and loans. An incorporated organisation ‘limited by shares’ has shareholders and can therefore generate equity-based finance via external investors for example from angel investors, VCs and through equity-based crowd funding platforms. On the other hand, it does make it harder to source philanthropic investment. This is more readily available to organisations ‘limited by guarantee’, which have an asset lock, cannot access equity-based finance and usually operate in the ‘non-profit sector’.
In the early stages of formulating a business plan, entrepreneurs should consider where most of their income and funding will come from and choose the most appropriate legal structure. If the majority is via donations and grants, limited by guarantee is probably the best option. If most income will come from profitable trading and they need investment, they might want to consider limited by shares.
In the event an organisation’s chosen legal status is ill-suited to its business model, and hampering efforts to secure funding, changing it may be part of the solution.
3 – Does your business have a SOCIAL mission?
It is important to remember that legally there is no such thing as a social enterprise and any organisation can have a social mission. In fact, it is increasingly the case that socially conscious businesses outperform their competitors. There is a simple reason for this – people are increasingly looking into the social and ethical profile of an organisation before deciding whether they want to work with and/or buy from them.
In this new socially aware environment, an organisation’s ability to articulate, deliver and report on its social credentials can have a significant impact on its attractiveness to customers, employees, investors and philanthropic funders.
4 – SEX or gender of the founder
More women are starting and scaling successful businesses than ever before. Yet this message is not getting through to the investment community – female entrepreneurs receive less funding than those headed by men at every stage of their business’s development. According to the recent Rose Review of Female Entrepreneurs, companies headed by women start with a third less capital and receive only one percent (so 1p in every £1) of venture capital investment.
Conscious and unconscious bias on the part of the potential investor is a major factor, and was recently highlighted in research from London Business School’s Dr. Dana Kanze. Her PHD study found that while investors might ask a male entrepreneur promotion focused questions, such as how they plan to acquire new customers, female entrepreneurs would field prevention focused questions for example how they might prevent existing customers from leaving. As investors are all about gains being pigeon-hold as the one who will manage losses has a profound effect on investment outcomes.
Women in business should be on the lookout for this trend and if asked prevention questions answer then turn it around to a promotion response about the gains they will make for the business and in turn the investor. Hopefully this will encourage the investors to overcome their bias! We need more female investors (only around 10% of angel investors in the UK are female) and if you are an investor, do you really want bias to mean you miss out on investing in the next Cath Kidson, Sara Blakely, Stephanie Shirley or Lucinda Bruce-Gardyne (to name just a few)? If women entrepreneurs are not given the opportunity to reach their full potential, then we all suffer.
Invest in agreements
Beyond the Four S’s of scale-up funding, a common issue across start-ups and SMEs is the challenge of closing the deal and getting funding in the door once you find it. Agreeing terms can be tricky, mind-numbingly slow and can strain new and fragile relationships, sometimes sadly to breaking point. Anything that can smooth this process such as the work Docusign does to automate agreement processes, like document control and redlining, can help entrepreneurs to close the deal whilst focusing on running the business and building relationships with their new found investors.