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Angel or VC investment: How to know what to pursue and when

Many startups grapple with bootstrapping and deciding when the right time is to secure funding to turbocharge their next phase of growth. But many Australian startups have fallen into the trap of following the Silicon Valley playbook and chasing venture capital (VC) funding too early in their journey. 

Securing VC funding takes an enormous amount of energy and can dilute founder profit share, so the motivations for doing so need to be carefully considered. When you are still developing your idea, a combination of bootstrapping and angel investment can be a far better match to where you are in your company’s life cycle. Tech startups need access to investment to fund the development of their solution, but they need to consider who they choose as early-stage investors carefully. These decisions are key to long term viability and success.   

The best early position to be in is being able to scale without funding. As well as preventing you from diluting your stake in the business, it establishes that your product has a definite addressable market. But not all software is simple to make and sell, so it requires a different model to scale. At Lumi.Media we couldn’t latch on to early adopter customers as our solution requires several people in a business to agree they want to use it. So, we needed some money behind us early on. 

Most early-stage startups tap investment focussing on the three Fs and the three Ds, but that’s the wrong approach. While approaching family, such as the bank of Mum and Dad, or friends and random fools followed by doctors, dentists and other d!$kheads might seem like a sound approach, the reality is that you should seek investors as partners and not just as bags of money.

When a startup goes to a VC too early, it risks losing some control and diluting ownership stakes. If you can’t get to a point where you’ve got paying customers and are already operating with reasonable cash flow before you go to a VC, then they’ll be unlikely to invest. And if they do, you must question what’s left in it to drive and motivate the founders. If you can’t prove to a VC that you can actually deliver the predicted numbers, then they won’t be interested. Angel investors aren’t just looking at what you are delivering today; they invest in your potential. 

Angel investors are different to VCs because they invest in you as a founder and what you’re doing. If they believe in you and your vision, they may want to help. VCs don’t really care who you are or necessarily what you’re trying to do; they want to see a proven bottom line and a fast revenue trajectory. If you fail to meet the targets you’ve set, those relationships can get tense very fast. 

When you’re trying to fund and scale, choosing the wrong investors can kill your growth potential. I learned this the hard way. I launched my second startup with co-founders when I was 35 years old and agreed to some decisions around funding that, in hindsight, were naive. When I was 55 years old and had the benefit of wisdom, when it came to co-founding Lumi.Media I approached finding investors very differently. 

Instead of going out to the market with a sense of urgency and panic, I found it much better to approach key people and ask their advice. Instead of being desperate for anyone to inject funds, my focus was on finding the right angel investors to align with.

I sought meetings with high-net-worth individuals with deep business experience across the private sector, institutional and industry, but only engaged with them for advice. I never mentioned anything about them potentially investing, and I didn’t pitch. I was looking for mentoring and business insight. But what happened was they came back to me and opened those discussions independently, asking what we could do if they were to inject some funding. 

I have been self-employed in my own businesses since I left university. The past 39 years as an entrepreneur have taught me that the best way to scale a business is to first bootstrap and confirm you have an idea that the market wants to pay for. Then it’s time to approach angel investors for the seed capital to expand. Then once you’re growing and really signing customers, open up the discussions to find the right VC to partner with you on the next phase of the journey, scale seriously and enter new geographical markets. 


Read more: Let’s Talk – Raising capital


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