It’s an exciting day when you secure investment for your businesses, particularly – as is often the case with startups attracting equity investment – if you’ve been talking to investors for months. It can feel like the end of a long journey when the money finally lands in your bank account.
But to be honest, getting equity investment is just the start of the journey. Now the real fun begins with using the funds to grow your business and achieve those all-important milestones you will have agreed with investors.
It’s important to use the funds judiciously because, if the cash runs out before you achieve those milestones, it can be difficult to attract the next round of investment. You may find yourself in a situation where you need interim finance to bridge the gap between the milestones you need to achieve to unlock the next funding round and the reality of where you actually are!
Appropriately, such finance is called bridge funding. It allows you to solidify your short-term position whilst you secure a long-term investment.
Bridging the gap
For established businesses with proven revenue, specialist financing options are more likely to be available, but for early-stage startups, finding suitable debt-based funding options can be tricky, and you may find yourself needing to bridge the funding gap with another equity round.
If you do find your startup is running out of cash quicker than you had anticipated, don’t beat yourself up. Startups have to burn cash to develop their product, find the right market fit and get the revenue. However, don’t be an ostrich and stick your head in the sand. Instead, monitor your “burn rate” (the amount of cash your startup spends each month), forecast your “runway” (the amount of time before the cash in the bank is completely spent), and start exploring your bridging finance options sooner rather than later!
As a general rule, it is easier to raise investment when you are not desperate.
Here are four things to consider now to make it easier to attract bridge funding should you need it in the future:
Evidence of what you have achieved – investors call this “traction”
If you do need to attract bridge funding, investors will want to know what you have achieved with the funding you’ve had to date. They will ask “What traction have you got?”
Your ability to demonstrate traction is crucial in offsetting the risks associated with investing in early-stage businesses. The more evidence of commercial traction, the better-positioned founders are to secure bridge funding. Strong revenue will reassure investors but, if you don’t have this yet, focus on what you have got. Do you have a strong sales pipeline? What would this be worth (in revenue) if you converted your sales pipeline? How quickly might this happen?
Start with people you know – and who know you
It is always easier to start bridge financing conversations with people you know – and who already know you. If you have previously raised investment, start by asking your existing investors if they would consider a follow-on investment. You could even incentivise your investors by offering them the same valuation as the last round. If you have been proactive in keeping your investors abreast of your situation, and if you have generally made good progress towards traction, your existing investors may well do a “follow-on” bridging round.
By keeping existing investors informed of your progress now – before you need bridging finance – you increase the likelihood of investor support when you most need it in the future. Funding could take the form of an equity round, a loan, or a convertible loan, depending on the preferences of your investors.
And don’t forget to go back to potential investors you spoke to in the past but who didn’t actually back you. If you have good evidence of traction, they might welcome the opportunity to become an investor now.
Can you capitalise on SEIS/EIS eligibility?
If your business is based in the UK, it is worth checking if your business is eligible for Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS). Although you may have used up SEIS limits on previous investment rounds, recent extensions to the amount of investment that can be raised under SEIS could support you in your quest for bridging finance. Eligible startups can now raise up to £250K under SEIS and securing SEIS or EIS advance assurance can make your investment round more appealing to potential investors who want to offset their tax liability.
Could an advance subscription agreement (ASA) help you bridge the gap to a full funding round?
Many startup founders are nervous about a bridge funding round as they fear valuation discussions will go against them as they have not achieved the required milestones to secure a higher valuation. Using an Advance Subscription Agreement (ASA) as an alternative to a traditional priced funding round may help limit the valuation impact.
An ASA allows you to secure funding now while postponing the valuation until a full-priced funding round is completed at a later date, usually within six months. This allows you to access cash now and, whilst those putting in cash under an ASA are likely to expect some incentive (such as a discount on the priced round), without compromising too much on valuation. This is particularly useful if you are clear that the extra cash will allow you to deliver the milestones needed to launch and secure a full funding round.
Startups need cash – and it’s perfectly normal to discover you need more cash than you originally thought. Preparing your business for bridging investment before you need it makes it much easier to secure cash when you do need it.
About Hatty Fawcett
Hatty has a strong track record raising equity investment for early-stage startups, raising over £5m for start-ups in the last 12 months. She believes start-up investment should be available to everyone and the process shouldn’t be over-complicated or unnecessarily time-consuming.
Hatty focuses on start-ups raising their first or second round of equity investment and works with start-up founders and small business owners to give them clarity on the information that investors will expect and connecting them to investors and other like-minded entrepreneurs who are generous in sharing their experience and insights. Hatty encourages founders, giving them knowledge, tools and techniques they can use in their investor outreach so they grow in confidence and ability when presenting their investment opportunity. This confidence ensures founders attract a range of investors, allowing them to choose the right investor for their business and growth aspirations.
Hatty had more than 10 years of experience in getting startups funded and has seen investment from both sides of the fence, so is uniquely placed to understand the founder journey and what early-stage investors look for. Following a successful 15 year career in marketing, and a MBA from Imperial College, London, Hatty worked in two start-ups before launching her own start-up, for which she raised a quarter of a million pounds. She then looked after some of the investments Kelly Hoppen made when she was a Dragon on the TV show “Dragons Den”.
Hatty’s unique perspective on start-up funding, and the work she does to level the playing field when it comes to raising equity investment, has resulted in her being recognised as Enterprise Nation Adviser of the Year 22/23 for Finance and Funding.
About Focused for Business
Focused for Business is on a mission to level the playing field and make it faster and fairer for founders to raise early-stage (pre-seed/seed stage) equity investment.
Best known for its flagship programme, Funding Accelerator, Focused For Business gives founders the knowledge, tools and techniques to position their business for investment, find and attract the right investors and secure the investment to grow their business.
Since Funding Accelerator launched in 2020, the programme has raised over £10 million for start-ups, £5m of which was raised in 2022.