On funding and investment

I wanted to write a brief article here on my experience of raising funds as a small startup. It’s a bit of a prickly subject, and obviously my intention is not to upset or annoy potential or current investors. So I’ll try not to do that!

Firstly my observation is that fund raising is tough. What if your idea doesn’t make it like the ~50% of start-ups that fail for a myriad of reasons? What if the people offering to invest can’t really afford to lose it if things go wrong? Honesty at this stage, understanding your chances of success and failure, is really important in my opinion, as is an articulation of this to your investor group in an open and honest way.

An immediate crowd of people that you know reasonably well, who perhaps like the idea, may be prepared to take a limited punt on the success of your venture. If your close circle of acquaintances, ex-work colleagues and college pals aren’t investing in you, then there’s probably something afoot. Offering these folks tax breaks under the Seed EIS scheme can make the initial investment much more palatable, and make you as a start-up founder feel more confident about accepting money from people you know. I really have to thank the guys who have backed us to kick things off at ChargeSync. I really hope we can repay their trust in time.

The next stage of the raise seems to get more difficult, more complex and I think, interesting. There are in the main two different kinds of funding you can reach out for. A very popular one being crowdfunding. Those lovely websites and beautiful videos are a real lure. Apparently you can move quickly and get the raise up and running in no time. But a word of caution is due. Unless you want to put yourselves, or your early stage investors on a sticky wicket, make sure you review the Shareholder Agreements, amended Articles of Association and other legal paperwork that you will be forced to use or to adopt, prior to performing your raise, and do make sure you get suitable legal advice. There really isn’t a need to take the queen’ shilling and sign your life away. A rare few sites have terms which read like a chapter from “The Picture of Dorian Gray”. All that said, while we haven’t gone down the crowdfunding route (yet) there are some great people, and great sites propelling some great businesses to success.

Finally I guess it’s worth talking about the more serious investor community. Whether we’re talking angels, VCs, or whatever they might be called. Typically these guys are looking for businesses which have established cashflows, an established industry and a cut-and-dried business model, or at least more than just words which describe your idea. Most investors at this stage are hoping to understand their return in simple terms. In some of my previous posts, I talked about the detrimental effect that subsidies have on new businesses. I think this is a clear illustration of what I’m talking about. When we look at solar subsidy schemes, it becomes clear that investors have been capable of generating guaranteed (better than government bonds) returns of more than 20%. This creates a distortion in the market as all investors seek to expand these schemes, and to sink their money into bigger projects with the same level of guarantee. Frankly as an investor, this is an economically rational thing to do. Anything else outside of the subsidy world cannot compete (unless they receive subsidy too). For novel and new projects, or start-ups, this is an issue. Bigger returns need to be accompanied by bigger risks. Otherwise investors have no need to seek out risk to generate returns and become risk averse. This in turn stifles innovation.

Another angle worth mentioning on subsidy is that these are not from the government’s pocket or purse, but instead have been added on to our energy bills. Higher energy bills have been used to generate large guaranteed returns for those in a position to invest. Clearly ownership is another key element to making investment decisions, and I see the arguments that it’s better to feather the nest of the few and drive up renewable installations than not develop this technology at all. However I guess recent changes in Government policy suggest that they agree that  excess profits without risk for the few create a potential for people to become very angry about renewable energy before it has really begun.

So I see the end of large scale solar subsidies as good news for us all. Good news for innovation, and good news for the future of this country. I have real sympathy for the companies built around subsidy, and for their employees. But I would argue that the short term pain will create a stronger industry which is sustainable and offers a real future for its employees, whilst at the same time creating the right environment for innovation, and investment in innovation.

The next stage for ChargeSync is to reach out to larger investors who can help us to scale the businesses. We believe this has the potential to generate good returns, but will entail some risk. If that sounds exciting to you, and you like the idea of embedded energy storage then please get in touch.