The future of UK funding is agile
In this article, Anthony Rose, CEO and Co-founder of SeedLegals explains how the evolving legaltech sector is revolutionising the way founders secure funding.
The idea that less funding has been raised for UK start-ups simply isn’t addressing the variety of funding options now available to entrepreneurs. Traditionally, founders have to do funding rounds to raise huge amounts of money to last them from 12 to 18 months at a time. The process of fundraising usually takes months, over a year in some cases, leaving founders vulnerable to falling short in between funding rounds, and putting their business at risk.
Having worked with thousands of UK start-ups here at SeedLegals, here’s my guide on how agile funding works, how it’s putting power back in the hands of the founders and why we expect to see more founders using agile funding in future.
Large funding rounds suit VCs – but not founders
There’s a ‘go big or go home’ funding model which has historically ruled over startup land. This model is where a founder collects a number of investors (say 20) to raise a large sum of money (say £500,000) to last the business between a year and 18 months’ worth of development. The time it takes to raise this amount of capital has a knock-on effect on the round. It can take months to find, vet and negotiate with a large group of founders, in addition to the approximately three months it takes to close the round. This means founders have to add on an additional six months funding to whatever figure they originally had in mind.
Larger rounds appeal to investors because, from an individual perspective, being the only person to prop up an early-stage venture is a vulnerable position to be in, so knowing that your money is part of a larger pot of multiple investors, feels reassuring. For VCs too, they would rather a company go bust fast, or gain large traction suddenly, rather than trundle along growing slowly over a long time, even if the growth is sustainable. VCs typically want closure on their investment as quickly as possible – which often doesn’t match the typical founder’s business plan.
Founders spend months raising a big round
These large cyclical funding rounds can stunt company growth at the early stages. Typically, at your next raise, your aim is to reach three to five times your initial round and valuation. You’ll need six months to demonstrate business traction and company growth, and you should maintain at least three months cash in the bank at all times, to avoid the risk of trading insolvent. Combine this with the time it takes to find investors and close the round, your company will need to raise roughly 12 to 18 months in funding overall, which could add up to a huge amount. Add onto this the slow, laborious and expensive process of closing your round through a lawyer and founders can find themselves spending most of their working hours working on fundraising, rather than on all the other aspects of growing the company.
Legal-tech revolutionises fundraising
Agile funding is changing this dynamic, enabling founders to raise money faster, on demand, allowing them to take advantage of organic opportunities as they arise and to free up their time.
Legal-tech companies (such as SeedLegals) have developed the resources to help founders secure funding without the long, laborious processes, or the eye-watering legal fees, making raising money for your business more accessible and a much slicker process. Empowered with this knowledge, founders can be more secure, knowing that they won’t fall short between funding rounds because they can easily take a one-off investment or top up a funding round whenever they need to.
Agile funding saves founders a huge amount of time and keeps up the momentum of business growth. It also helps protect the founder’s internal ownership of the company, because raising millions of pounds worth of funding early on generally means that much of the company will be signed away to investors. The ability to use agile funding means that founders can raise more money at a later date, as and when they need it, most likely with the company at a higher valuation.
Take a one-off investment – FAST!
Existing products such as advance subscription agreements are widely being adopted across the UK, with 75% of funding rounds closed on SeedLegals already including a rolling close. This means that when you’re looking to raise a large sum, you have the option to close when most of your investors are on board (say 70%) and to then top up this round at a later date, which we call ‘instant investment’. This enables businesses to progress immediately, without waiting for funds to drop or additional term sheets are being developed. This is especially helpful if founders need to close a round quickly, for example, at the end of the tax year for EIS or SEIS reasons.
At seed level, agile funding means you can be opportunistic when raising funds. Say you meet someone who wants to contribute £20,000 towards your £500,000 seed round. An advanced subscription agreement (at SeedLegals, these are called SeedFast) enables you to create a contract promising shares in return for the money now, with the valuation to be decided at the next funding round. There’s usually a discount for being an early investor, plus a guarantee that their shares will be issued within six months. This option allows founders to take advantage of the opportunities that come their way without having to fund the business themselves when cash is short.
For founders, the future is agile
Founders might still need large amounts of money to get their business off the ground, but today more are doing so with the reassurance that there are agile, innovative ways to raise the money which safeguard their finances during this phase of development and free up their time to work on the more enjoyable aspects of building a business.