Should start-ups seek out investors?
I first heard about becoming “investment ready” when we were visited by someone from a business competition. The phrase was explained in the briefest of terms, and the benefits seemed to be lost in translation. Even now I’m not entirely sure why one would work tirelessly to turn their fledgling company into something which is investment ready, rather than just a successful business. When we explored the idea, it appeared more a means to gain either a short-term windfall for those who started the company or a sure way to offload a large share in the business – both of which lacked any merit in my mind.
What struck me most about seeking investment was not so much the work that had to be done beforehand but the amount that was given away for relatively little money. I remember attending a course which talked about receiving investment. For us, we could only reasonably expect an investor to hand over an amount within the tens of thousands, if we were lucky. This was because Lashbrook Lassis was competing in a crowded market and we were a fairly low-tech enterprise (which for any investor, is a massive turn off). And in return, we would probably hand over about a third of the company.
To put an investment of around £40,000 into context, we spent £25,000 on the most basic of production equipment. We attended a manufacturing exhibition where several sales reps quoted us over £100,000 for just the smallest amount of automation in our lassi-making process.
Then there is often the need for follow-up investment, especially as businesses become more successful. In some ways I’m almost relieved we never managed to gain a listing with one of the multiples, as we would have undoubtedly needed to upscale our manufacturing equipment and probably been required to make a marketing investment as a contingent for receiving an order. However, having investors inject further money into the business only dilutes your share further.
I know of some alternative investment models, such as Honest Tea’s (a beverage company in America). They created a scheme whereby the owners held “warrants” in the company, then as the they achieved their goals these warrants became more valuable. However, such equity structures are generally the exception rather than the rule.
Instead, I would have leapt at the opportunity to be part of a start-up incubator. Currently such incubators are synonymous with university labs; but academics are not necessarily the best people to monetise their ideas. I believe more incubators should be attached to private sector companies, not public sector bodies, as there is an opportunity to pool resources for small businesses and draw on the experience of the overarching business. There are examples of this, such as Tea Pigs (owned by Tetley’s) or Harris + Hoode coffee shops (owned by Tesco), yet the opaque nature and negative press they receive for such arrangements will only dissuade other entrepreneurs from trying to follow a similar path.