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Why raising funds for your startup comes at a price

Why raising funds for your startup comes at a price

You would think that raising funds for your business would be a free affair. After all, you’re looking for money to come into your business, not go out. Yet, many founders are taken aback at the hidden costs related to fundraising. 

If you want to make sure you’re not losing cash when you should be making it, it pays to think ahead. You don’t want to go into a round of pitching to investors only to realise that a chunk of what you’ve raised is about to disappear into thin air. 

Why fundraising is never free

Put simply, when you try to raise funds, you have to pay something out. This includes admin costs, legal fees, and any tools you use to track your fundraising efforts. 

Legal fees will take up the biggest chunk of your cash because the startup generally pays not only their own legal fees but the investors’ too. However, you should certainly think about negotiating this if your startup is in its infancy and cash is tight.

Also, remember to ask for a cap to be placed on costs, so you don’t end up losing all your investment on fees.

In the UK, legal fees are typically between £10K and 100K, which is staggering! So, a few things to bear in mind:

  1. Identify who is going to pay the legal fees and at what point.
  2. What costs are you looking at?
  3. How are you going to handle legal fees, and who will handle them?

It’s important to get a general estimation of how much your fees are likely to be because otherwise, you will find it extremely difficult to do any planning.

Raising funds is designed to give your business a future you can build upon, and if you’re unsure of outgoing costs, you’re going to find it hard to start your growth plan.

How to manage and reduce the cost of fundraising

While you can’t completely avoid fees as part of your fundraising process, there are ways you can manage and reduce what you pay out. 

1. Streamline your pitching process 

It’s easy to assume that the more hands you have in the process, the more money you’ll raise. Not so. More hands means more potential for confusion and mistakes, and mistakes cost money.

If you have several founders in your business, pinpoint simply one person who is going to do the fundraising and leave it at that.

It’s never a good idea to employ someone to do your pitching or to outsource this in any way. You know your business better than anyone, so you don’t need to pay someone to tell the story you already know.

All you need is a good-quality investment deck. If you’re not particularly design or tech-savvy, it’s quite affordable to get someone to do it for you. 

Use your network and make use of the contacts your contacts have! It’s often a case of, "I know someone, who knows someone", and most of the time that gets you in front of (and impress) an investor who is willing to throw a fair chunk of cash your way.

2. Time is money so use it wisely

The amount of time you put into your fundraising also equates to money. You’re away from your desk and away from the business in general and that may cost money if you have a small team or you’re responsible for key functions. 

Manage your time effectively or ensure that you delegate to cover all your responsibilities accordingly. 

3. Identify tools that could help

It’s very unlikely that you’re going to find one investor who’s willing to invest everything you could possibly need. That’s the dream, but it rarely happens. It’s far more likely that you’ll have several investors who pitch in smaller amounts and you’ll need to keep track of it all and the associated costs. 

On a side note, this is also precisely why you need to keep your cap table tidy and up-to-date!

Fundraising platforms help you to keep track of all of this and also allow you to stay ahead of the game in terms of what you need to pay. Odin is a good value fundraising platform, but you could also use Vauban. 

Of course, even this part of the deal isn’t free as platforms also charge a fee. In most cases, this is a flat fee and a small percentage of your fundraising efforts.

Overall however, it’s worthwhile because otherwise you may end up making a costly mistake simply because you couldn’t keep track of your efforts. The same can be said for equity management.

You can also find tools such as investor lists, and content management systems, and you can also make use of Google Drive for storing all your important spreadsheets and information.

Take the time to research tools and identify the ones that are right for your business. Don’t simply purchase subscriptions to tools because you think you’re supposed to - not every tool is right for every business.

4. Utilise SEIS/EIS

Another good idea when putting together your fundraising portfolio is to make use of the Seed Enterprise Investment Scheme (SEIS) and/or the Enterprise Investment Scheme (EIS).

There are lots of great reasons to apply for SEIS/EIS - it could just be the cash injection your business needs to grow and succeed (like it was for these companies).

And both SEIS and EIS are very attractive to investors because they provide tax reliefs.

Download our free guide to learn all about SEIS and EIS.

It's worth knowing that some VC firms have pools of money set aside specifically for investing in early-stage companies under SEIS/EIS.

By now, you've probably begun to accept the cold, hard truth that fundraising is never free. But by understanding the potential costs associated with fundraising, you can plan more effectively and keep your head above water. 

Best of luck!

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