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Investment: to raise or not to raise?
That is the question.
To raise or not to raise, that is the query, Whether 'tis nobler for a startup's fury To seek angel investors or venture's grace, Or endure the bootstrapped, lean, solvable case.
I promise I’ll leave the faux-Shakespeare there…. this week I’m back to the subject of raising investment. And specifically whether it’s the right route to go.
Whether or not you raise external funding depends on two main things:
1. Whether you want to raise money.
2. Whether you are able to raise money.
Because let’s be honest about this, you may be up for getting an injection of cash but that in no way guarantees you’ll be able to.
Let’s dive in.
Do I want to raise money?
I guess I could have added another question “do you need to raise money?“ But whilst need may drive people to look for external sources of funding, it shouldn’t be the sole driver. Raising money isn’t just about having the resources to hire people and pay yourself (although of course, this is an important factor), it should also be about getting to the next milestone as fast as possible.
Why would speed be important? Well partly your own sanity.. do you really want to hang around forever? And partly because you’ve spotted an opportunity that undoubtedly someone else somewhere is also thinking about. I co-founded an online real estate agency, probably the first of its kind in the UK, and we bootstrapped it for years. After several changes to our model all executed at a snail’s pace, we watched the VC-funded Purplebricks fly past us at a rate of knots. We then decided to raise some money but it was too little, too late. The race had been won (although it turned out to be a Pyrrhic victory, but that’s for another time).
On the flip-side, plenty of fully bootstrapped SaaS businesses have become incredibly successful. Companies such as Mailchimp, Basecamp, Atlassian (creators of Jira and Confluence) and many, many more became successful without raising external funding early on.
Taking on an investor, even an angel investor, changes things. Firstly, the process of raising money is time-consuming and stressful. You will get lots of knock backs and may experience all sorts of weirdness - from misogyny (a female founder friend of mine says she will never raise again based on her experience) to patronising unsolicited ‘advice’. That’s not to say all investors are weird, far from it, but some will never get what you are trying to do.
Once you get investment, suddenly your company is no longer just yours. Depending on the scale of the investment, you may have your investor sat on your board. This isn’t necessarily a bad thing, it’s more that it’s different.
On the plus side, a great investor will help you on the stage of your journey with advice based on their experience of working with similar businesses and a network of other people who can help. Plus it’s a great validation of both you and your product.
Am I able to raise money?
I often hear people say stuff like “I might go and raise some investment” in the same way as they might announce that they are going to McDonald’s for a cheeseburger at lunchtime. But the reality is that it ain’t quite as easy as all that. Especially if you are an agency thinking about spinning out a product.
When I ran an agency with ambitions to raise money for our side-products, I naively thought that the fact that we’d had some successes already would have investors desperate to get a slice of the action. I took a VC contact out for lunch to ask for advice about what we could expect and watched him demolish both the steak I was going to be paying for and my dream of having a portfolio of start-up products that someone else funded.
The problem is that investors firstly want to know what they are funding (not just some vague promise of future brilliance) and what they are owning. So for this VC, what was he buying exactly? An agency with a collection of existing side-projects and something in the future as yet unknown. Like some bric-a-brac collection of half-baked businesses, it wasn’t interesting to him. The idea was ‘uninvestible’, to use his exact diagnosis.
How did we get around it?
It wasn’t until we took the radical decision to drop the agency and our random side-projects and instead make a concerted effort to focus on one SaaS business, that we were able to have credible conversations with investors. Then our story made sense and our background as agency founders became a bonus.
Generally speaking, if your plan is to create a new SaaS product and phase out your agency, then you will be able to make that case to a VC.
If you want to run a consultancy alongside a SaaS and it all makes logical sense why you would have both, then a Private Equity (PE) route is a more likely option.
If you are looking to move from a consultancy company with a SaaS product, to a SaaS company with a decent (related) professional services element, then you could do either.
But if you want to carry on running your agency and experiment with some SaaS start-ups on someone else’s dime, then I think you are going to struggle to find anyone willing to back that. The exception would be if you can make a credible case for being a ‘Venture Studio’ - in which case probably a PE route would work. But this would have to be a model based on a real plan and solid successful experience, not a punt.
VCs vs PE: a very quick summary
VCs tend to invest earlier. They are looking for ideas with fast-growth potential. They are more tolerant of risk and accept a higher failure rate because of the potential significant return on the investments that make it. They will take a minority stake.
PE investors are more interested in established businesses with a track record of profitability. They are more risk averse and invest at a later stage when a business has already proven itself. Their model is to find operational improvements and financial engineering to maximise their return. They will often (but not always) want to take a majority stake.
So which one are you? An agency who wants to become a SaaS business instead? An agency where your SaaS product enhances your existing service? A consultancy with a SaaS business looking to become a SaaS business with a professional services element? Or are you hoping that one of the side hustles you are dabbling in will magically take off?
If you are a consultancy with ambitions to grow a SaaS product and your plans include raising money in the future, you need to start thinking now what type of investment you want and what type of company you want to present to the world. This will depend on the size of both your consultancy and SaaS offering, the relevance of one to the other and your appetite for change.