How Your Sector Might Influence The Funding You Choose
Like the revolving door of what’s hot or not in ‘fashion’, ‘pop culture’ or the latest fusion cooking trend, business sectors can also create similar bubbles of hyper-enthusiasm and (importantly) follow on investment.
If you’re launching a product and/or aiming for a fundraise, the sector you’re in might have a dramatic impact on success, particularly if you’re in the latest hot sector because, investors are people, just like the rest of us, and they get excited about what’s hot or not and like to follow the crowd.
Take our dusty old legal sector as a prime example, because legal tech is going through a particularly exciting phase, as evidenced by a huge surge of investor interest.
In 2013, $458 million was invested into the US legal tech space (vs. $66 million in 2012), and a similar wave of excitement is gripping the UK market, with multiple new entrants tickling the interest of investors.keen to back new models capable of disrupting this historically low innovation space.
But while deregulation, innovation and investment have combined to create a perfect ‘transformational’ storm in the legal sector, it remains a cautious and conservative space with an incumbent resistance to change, from buyers and suppliers.
Whilst undeniably a “hot” space, these particular dynamics shape the type of investor (and potentially speed of return) interested in backing legal innovation because it’s a market that needs more education than some and therefore, change might require a longer play than elsewhere. It’s an example of how different sectors, can influence your funding strategy and partners.
Find An Investor Who Gets Your Market
Not every investor will be as excited or comfortable with entering a new space or disrupting a market as you and your founding team. You’ll need to find the right type of investor, ideally someone who, if they don’t have a background in your target sector, get it. This is about understanding the customer, the decision making process and can see the opportunity but also the reality.
You have to convince that your product, team and execution team can make the breakthrough and be careful about pioneering; it’s almost always safer to follow in behind those blazing a trail.
Do Your Research
Your research into potential investors (angels or institutional investors) should focus on the background of key decision makers and the type of company in which they’ve previously invested.
Ideally you can start that conversation with someone who intimately knows your market and therefore, has a chance of predicting how they might react to your innovation, marketing, vision.
Ultimately, being in a ‘hot’ sector might well help you get attention but, it’s not going to camouflage a poor quality product, weak team or flagging performance.
Bring It To The Table
If you sit in front of any panel of experienced VCs, business angels, institutional investors, then you will almost always hear the same mantra; they will invest in a team they think has the capability to execute, be it through sector experience, complementary talents and/or sheer grit/determination. They want to see traction that shows there is market appetite for your product and you (at least partly) now how to reach out to it. Investors will be sector agnostic about these two requirements.
The funding journey can become an unexpectedly difficult process, particularly as start-up entrepreneurs tend to set off with raised expectations about what they’re bring to the funding community. Fund managers see hundreds of opportunities a year and the vast majority of those carefully crafted business plans go into the bin (rather quicker than you imagine). The key with any funding strategy, is to understand what will trigger that engagement and interest to find out more.
Some of it might be cultural; what’s their background, expectations, market reputation? How do they operate, who do they operate with, is it compatible with you and your business? Try to align your own ethos and vision, with those of your funders and the conversation will be a lot smoother.
Consider Funding Structures
Different types of funding structure will bring different cultural issues into play. A recent US article on crowdfunding described it as a ”fail first culture’; the idea is you can go out and fail a bunch of times and strengthen your company, find different partners’.
Clearly risk appetite will also vary across different sectors. If you’re raising funds in a sector that’s experiencing a bubble of growth (anyone mention FinTech)? then you’re likely to find a much more aggressive risks appetite than if you were entering a more dusty, slow-moving sector.
But be aware, like any investment in any fields, if risk appetite is high, then expectations of return (and the speed of that return) will be likewise. Again, if entering a space experiencing high growth and quick returns, that’s what your investors will be demanding and whilst it might be a collegiate, supportive atmosphere during the pre-completion flirting, what will be their expectations and behaviour when you’re going through a dark phase of trading and not hitting the forecasts, around which you closed the raise?
Keep It Real
With any fundraise, take a step back from your forecasts and conduct a reality check. No funder will expect you to deliver to the letter of your business plan; no business plan ever executes as expected. However, they will be backing you on the basis of your ability to execute and those forecasts will be the key measurement tool.
With each new presentation, you’ll find yourself tweaking your forecasts, model and elevator pitch but from my experience, every start-up should seriously consider halving their original forecasts and doubling their timeline.
Raising funds is often a time-consuming, distracting and frustrating process. It’s therefore vitally important to research the market in advance, strategise who you need to get in front of and minimise any wasted time. Some funds are sector specific, others are more agnostic. All look at the same thing: team, traction, technology.
In general, the more hi-tech a business, the more likely you can find a narrow, specific fund and knowing your market, understanding who plays where. More general opportunities may need to pursue a wider strategy and contemplate more open fundraising platforms.
Ultimately, whatever the sector, however open or closed they are to ideas, our experience shows that if you have a great project, a strong team and sufficient traction, the right funds for your business are out there. Know where you want to get to and how funding will take your there. But to minimise the time you spend on the search for funds, you need to understand the right fit for your business, and your sector.
In the end, this is how your sector might influence the funding you choose. Got any legal questions you need answering about your startup and funding? Then book a free Startup Legal Session below.
Article written by Andrew Weaver.