How to Raise Equity Investment
The following extract is from the Xero Gravity Podcast
It took 18 years of corporate life for Scott Haughton to make the leap to entrepreneurship. Like most successes stories, the road to where he is today was unconventional. Inspired by an entrepreneur at a conference, Haughton realized it was time to pursue his own venture. Not knowing what that venture would be, he eventually set his sights on luxury indoor play facilities.
Haughton spent the next 18 months raising capital. This meant ticking boxes, and learning everything he could about startups. He quickly became a children’s soft play expert. However, the central London commercial property market was not on his side. Scott had raised an impressive amount of finance during this time. However, due to delays securing a location, the offers lapsed. Scott had to return all of his money to investors. Although this may sound like a familiar story of failure, it wasn’t that at all. Like all good entrepreneurs, Haughton was on the fringe of discovering his true calling. As one door closes, another door opens.
The frustrated entrepreneur
Haughton says he’d always been a “frustrated entrepreneur.” He was never quite sure what his venture would look like. Sure enough, after leaving Glaxosmithkline, Scott spotted a gap in the market and the cogs started to turn.
“My children were very small at the time and we were spending a lot of times at these indoor play facilities that were paradises for children, but a complete nightmare for parents. Parents were just cringing on plastic chairs with plastic cups of coffee.” Haughton says.
“I came up with the idea of combining a paradise for kids with a bit more luxury and quality for the parents. Looking at the people who would attend these places you had partners of law firms, bankers, city traders. These were affluent men and women, yet the offerings were very poor.”
There was a gaping hole just waiting to be filled and Haughton was going to be the man to do it. The idea later proved the easy part. Things became more difficult. Haughton’s inexperience with the finer points of entrepreneurship started to arise.
“I knew nothing about starting a business. I’d always had everything in the corporate world provided for me. I was also doing it on my own which was hard. My advice to anybody starting a business, try find a partner with complementary skills.”
He committed to putting everything he had into it. He negotiated a redundancy package that served as a comfort blanket. This gave him a deadline by when he needed to have everything up and running.
“I know I was very fortunate to have that, but time was running out. It was a 12-18 month comfort blanket. You can’t afford to make a mistake, but you have to take the leap of faith.”
Raising capital 101
Haughton admits he knew nothing about raising finance when he first went out in search of investors. Subsequently, he learned very quickly the major dos and don’ts when trying to attract equity.
“I needed to raise a minimum of £750,000, and in the early 2000s the first port of call was the bank. It seems so strange in 2017 to talk about banks lending, but I was one of the very few who secured an unsecured loan from the bank of over £150,000. I was willing to put in £150,000 of my own money to get skin in the game, but it was money we couldn’t afford to lose.”
“It’s an onerous process and there’s a lot of bureaucracy. I found myself with £150,000 of my own money, £150,000 of the bank’s money, and was looking for £450,000 of equity investment. I knew nothing about business angel investors or the venture capital space so I had to become an expert pretty quickly.”
At this point, Haughton touches on something many entrepreneurs overlook. The importance of finding the right investors when you’re going to be giving up a part of your business to them.
“I needed to cross the equity bridge. When people invest, it’s no longer your baby. Venture capitalists (VCs) aren’t risking anything personally, but a private individual, they’re risking every pound they put up.”
“You have to put in enough money that shows there’s enough pain invested for you that you couldn’t just walk away and let it fail. You have to prove you’ll do everything you possibly can do to make it a success. You can’t afford to lose your life savings.”
“In the end I raised £750,000 based on a business plan, a piece of paper. I was left with 30%, but the VC was willing to put in a ratchet clause that enabled me to claw back equity according to milestone achievements,” Haughton says of the deal they had negotiated.
Let the hard work begin
It’s at this point that Haughton assumed things would get easier. He’d raised the capital, and that was the hard part, right? Apparently not.
“I thought raising capital was the biggest thing to be achieved. I thought it was on a roll from there.”
“My business was all about finding affluent areas around London, so I needed to find 8,000 square feet of property with high ceilings and parking nearby. It was at this point I realized I wasn’t a covenant and was really going to struggle. As a landlord, would you rather rent to a startup or a massive pizza chain?”
“I thought to secure commercial premises you just scoured the estate agent market then put in an offer, but it doesn’t work like that. You need to appoint an agent to act on your behalf and market you to all the commercial agents.”
“Luckily when I needed property I had the money to show people. If you don’t have the money they’re not going to take your phone call, but I was still up against the lack of a track record and other leisure chains.”
With several parties involved Haughton says finding a property everyone agreed on was proving impossible. It was no longer about just his personal deadline, but one of his investors too.
“My VC was under pressure to get their money out the door. Their offer of funding had a six-month window and sadly I wasn’t able to secure it within that. I had to return the money.”
“I was frustrated. I’d thought raising the money would be hardest part, but with hindsight, finding the property was always going to be the hardest thing.”
Just like that, the business Haughton had poured every piece of himself into for 18 months was falling away. This was all because three people couldn’t agree on a property. But what appears to be an ending in fact wasn’t that at all, as Haughton was about to learn.
“I’d been introduced to someone who’d sold his business and was doing loose consultancy advising individuals on raising finance. He’d introduced me to one of my VCs so we’d built a good relationship. When my offer was elapsing he suggested the pair of us probably knew more about raising finance than the majority of people out there I’d come across, so we decided to share our learnings with other aspiring entrepreneurs.”
Haughton had acquired knowledge that is absolute gold in the entrepreneurial space. Most entrepreneurs only need to raise capital three or four times in their lifetime. The majority are poorly equipped to hold their own at a table of people who invest in businesses like theirs for a living. It was a massive opportunity, one Haughton felt his learnings could be of real use in. Haughton Put two and two together and shortly after this, Envestors was established.
“We started Envestors in 2004, with the aim of helping early stage businesses help entrepreneurs navigate the path to securing elusive private investment from individuals and early stage VCs. At the time we were new kids on the block, which resonated quite well with the entrepreneurial ecosystem in London at the time.”
So how do Envestors bridge the intermediary gap between entrepreneurs and investors? As it stands, the business model is primarily one of consultancy.
“We’re looking to advise other early stage businesses how to become investor-ready. We charge an advisory fee and a success fee.”
“Envestors has massively changed over the years. We started with just a handful of investors, but we’ve now built up our own investor network to high net worth, ultra-high net worth, family offices, and early stage VCs. We also have a staff of about 26 and receive roughly 100 business inquiries each month.”
Not just a consultancy, Envestors are also there to play matchmaker between the businesses and their investors.
“We look to engage with about three or four companies each month. We’re quite picky about who we invite. We have a good track record of finding quality companies and rejecting ones that won’t be successful.”
If a business’ application is successful, Envestors will prepare a fully regulated investment pack. It all sounds fairly straightforward in theory, but the Envestors team also jump through all of the hoops Haughton once grappled with on behalf of the entrepreneur and their business.
“The majority of our investors are looking for businesses that generate 10 times their investment over a five to seven year time period. They know they need a portfolio of five to ten companies to invest in, so they certainly aren’t putting all their eggs in one basket. They’re also aware that at least three or four will fail.”
“From an investor’s point of view, they can claw back their tax on here in the UK on the ones that fail. Their biggest challenges are the ones in the middle that are like zombies, they’re alive, but only just.”
And the business model isn’t just about entrepreneurs putting their all in. Wannabe investors are also thoroughly vetted before being allowed access to the Envestors private network.
“All our investors have to register with us formally. They then have to comply with the strict Financial Conduct Authority regulations which we do through the platform we built ourselves.”
“We have to be able to provide comfort to our client companies that all our investors are fully registered. Our clients can be assured we’ve vetted our investors, and that we try match them as best possible with our client companies.”
Now with a solid decade in the game Haughton has seen it all, and has a couple of key tips for entrepreneurs looking to raise capital.
Nail the exit plan
Think an exit plan is for the last page of your business plan? Think again, Haughton says. “Investors walk into the room backwards, so the first page of your business plan should be the exit opportunity. They wanna know how they’ll get their money out of this investment. They’re not looking to be greedy, which is why they don’t want over 50% of a business, but there absolutely needs to be an exit opportunity that’s spelled out and that everyone’s bought into at the very beginning, if there isn’t most investors will walk away. It’s not a stock market.”
Know how to sell
“They need to know how to sell their investment proposition. We now see a lot of technical companies who’re stars in their fields, but don’t know how to crisply pitch their business to investors. Private individuals who’re wealthy and have made their money don’t need to invest more money, they can quite comfortably sit in their arm chairs. You need to get them out of their arm chairs and off their remote control. They typically have short attention spans, so within 5-8 minutes you need to nail your proposition. It often comes down to whether or not this will be an exciting acquisition for a large corporate.”
Envestors are putting entrepreneurs on the table in a very unique and effective way. They’ve since helped their clients raise more than £100,000,000 in capital. It’s a fast-growing game to be at the forefront of. Not to mention their global presence in London, Dubai, the Channel Islands and Monaco. Moving into 2017, Envestors have got their sights set on China, Canada and Russia also. They look set to continue reaping the benefits of their in-demand skillsets.