For an ambitious start-up, fundraising can be fraught with problems, not least when it comes to the timing.
The company Onedox
What Free online dashboard for household bills
Where London
Founders David Sheridan, Hugh Nimmo-Smith and Richard Lewis
Operating since October 2015
Our company, Onedox, has built a single online “dashboard” for consumers’ household bills. As well as giving people a better record of what they’re paying, the service provides automatic notifications whenever a better deal is available, inviting them to switch providers. In short, we hope that our start-up will save people time and money.
We’re pleased to say we’ve got the platform up and running with very little capital. However, it is inevitable that eventually we’ll need much more significant resources for marketing and PR in order to secure customers. Our site is free for users and we plan to earn introduction fees every time that we help a customer save money by switching to a new supplier.
Is it better to prove first that this commercial approach is viable with a small number of customers, then seek to raise significant investment?
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Alternatively, should we seek that investment prior to proving the revenue model works? Plenty of businesses have raised significant amounts of venture capital to draw customers in long before they’ve worked out how they’ll actually make money from them, but is this “build it and they will come” approach still a credible approach to building online businesses?
Expert one: Martin Leuw is a former chief executive of Iris, the software company
There are big questions for any investor. How big is the market? What types of people are most likely to use your site regularly? What is the commercial model? What are the barriers to entry for competitors? How will investment be most effectively deployed?
You want to know which comes first, the users or the commercial model? I think you need to tackle both. Develop a three-year business plan that articulates your strategy. Then secure an angel investment round from private backers to raise enough money to improve your platform for mobile phones, to accelerate how quickly you are winning customers and to initiate affiliate marketing and partnership deals. These can be enhanced as sales volumes increase, but you will be demonstrating that the revenue model can work at a smaller scale.
Raising investment can be time consuming and expensive, but hopefully you’ll strike a better deal later when you’ve proved the business model more decisively. It should also be quicker to raise a smaller amount now from angel investors who can benefit from government tax reliefs through the Enterprise Investment Scheme. I’d also recommend talking to technology start-up “accelerators”, such as Wayra and Seedcamp, which can provide hands-on support, advice and investment to help you get to the next stage.
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Expert two: Tim Rea is a director at ePlanet Capital, an investment firm, and advises entrepreneurs
The question of when to take investment, or indeed whether to take it at all, is one of the most important questions that a business in its early stages has to grapple with.
Remember, the risk profile for the investor will be different depending on which stage you are at. Each level of risk will be reflected in the price that an investor is willing to pay. From an entrepreneur’s perspective, it is about how much of the company you’ll have to give away.
It sounds as though you’ve got your proposition to the stage where you are ready to take it to market. You will find it easier and cheaper to raise money if you can fund market trials yourself and get to the next stage where you can demonstrate demand and your ability to exploit it. Don’t disregard the chance that funding will not be forthcoming, as investors’ appetite for risk tends to fluctuate.
I’d always advise businesses to engage with investors constantly, no matter what stage they are at, in the spirit of ‘we are growing our business, we might take investment at some point and we are interested to know which investors out there share our vision’. Finally, understand that by taking investment you are acquiring substantial overheads and relinquishing substantial control. Always think twice before taking money if you don’t absolutely need it.