The pandemic has changed investor behaviour and how companies raise funding. Agile funding is a growing trend, where early-stage companies raise smaller amounts of capital more often instead of the traditional “go-big-or-go-bust” funding rounds.
This is because the current business environment is so changeable that entrepreneurs increasingly prefer the freedom to raise financing as and when they can, opting for smaller increments over a large lump sum.
Previously, start-ups and fast-growing companies would typically raise a lump sum every 12 - 18 months. It would take three to six months to find all the investors and negotiate deal terms, and cost between £,3000 - £20,000 in legal fees, estimates SeedLegals, a legal automation platform for start-up funding.
But now entrepreneurs can use innovative financing options to speed up this process. Yvonne Bajela, principal at Impact X Capital Partners explains,
In light of Covid-19, the entire venture capital ecosystem slowed down. I saw a lot more companies move to an agile funding model in the second and third quarter.
Anthony Rose, co-founder and CEO at SeedLegals, says “Startups are all about being agile. Product development, marketing, hiring, customer acquisition approaches are all agile… 12-18 month funding cycles aren’t. The good news is, that’s changing.”
Entrepreneurs can tap a range of solutions, from tech offerings like SeedLegals’ SeedFAST and Instant Investment platforms, to short-term bridging loans, revenue-share agreements from new providers like Clearbanc and the government’s Future Fund Initiative.
We’ve outlined five popular forms of agile funding, including how they work and how you can use them to grow your business.
SeedFAST is for entrepreneurs that need to raise money ahead of a funding round but don’t want to commit to a valuation – or as a bridge between rounds. Investors subscribe for shares in the company’s next funding round in exchange for cash today.
2. Instant Investment
Instant Investment lets businesses top up a round. If you want to raise say half a million but can only find half that, you can close the round anyway and set deal terms to top up the rest in the future – with no need for further investor consents. This lets businesses secure funding more quickly, and keeps the door open for more investors.
Business owners need to keep a good handle on their valuation though if undertaking multiple funding rounds. Yvonne says, “If you give away too much equity early on, that will hurt when it comes to a priced round. You don't want to dilute more than 20% in any particular round. Some companies lose sight of that.”
3. Short-term bridging loans
Short-term bridging loans can also plug the gap between funding rounds. UK short-term lending hit £4.5bn in 2019, an increase of 19.7% compared to 2018, according to the Association of Short Term Lenders. Bridge loans usually last up to a year and are backed by some form of collateral, like property or inventory. You can typically get one within two to six weeks.
These are relatively easy to sign up to, but the risk for entrepreneurs is taking on debt. Mike Lebus, co-founder at the Angel Investment Network, warns, “Having to pay back a loan can put a strain on your cash flow, especially as interest rates on short-term loans tend to be quite high.”
4. Revenue-based financing
Revenue-based financing is another agile funding tool growing in popularity. Toronto-based e-commerce investor Clearbanc launched in the UK in October, to invest £500 million in online start-ups. It offers financing in return for a percentage of revenues, so is a good non-dilutive option. The downside is that providers tend to base their criteria on a company’s trading history. This means it is suitable for established companies but not for pre-revenue companies, which rules out many start-ups.
5. Future Fund Initiative
Pre-revenue or pre-profit companies can instead apply to the government’s Future Fund Initiative, which launched in the wake of the pandemic and offers convertible loans from £125,000 to £5 million. Applications are open until the end of January.
Case study: Oggs funds its Christmas expansion on Instant Investment
The Instant Investment platform was the right option for Oggs, a plant-based food business recently based at Workspace’s Vox Studios in Vauxhall. Sales of its plant-based alternatives to animal products like eggs have rocketed, but it needs to invest heavily in its growth journey in the build up to Christmas, says chief financial officer, Duncan Payne-Shelley.
SeedLegals is good for smaller companies raising under the £2 - 3 million mark, says Duncan. It took Oggs about a week between finalising documentation on the Instant Investment platform and receiving the funds. Duncan says,
The suite of documents are standardised which investors love, and the platform is much faster than using external lawyers. It’s a great way to raise financing quickly due to the cost, speed of response and process management.
Even in the face of difficult market conditions and an uncertain future, savvy entrepreneurs can find suitable funding options to prepare for future company growth. Luckily for business owners the range of agile funding options is growing, offering faster financing and more flexibility.
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