Business Leader Magazine: Funding an early-stage business in the current climate

The winds feel harsher this time of year - but that's not because it's February. It's mostly because we are living through a cost of living crisis. The festive season is well and truly behind us and the New Year has hardened with recession, increasing interest rates and swarming industrial action.  The UK Government tell us we're technically not in a recession but I feel this is one example of where perception is stronger (and more relevant ) than reality. 

This reality check can also now be felt in the investment world. Fundraising events are now more sober affairs. Some would say the funding market has caught a cold. I believe it has simply returned to its senses. Funding a business - in particular, an early-stage business - had become a celebration in its own right. This did nobody any favours. Clearly, successfully funding a business is a key milestone. Everything which flows from being  funded cannot happen without that first stage. But as every entrepreneur knows, when you've funded your business, you haven't actually achieved anything yet - at least where your business is concerned. It's how you put the investment to work that matters.

The trouble is, from the evidence, many entrepreneurs didn't know this and have had to figure it out the hard way. In my experience, when you have too much money, you waste too much money. In any business - again, particularly in a start-up - you will waste money. The skill is, in the early years, to keep this wastage to an absolute minimum. That's why there is great value in developing your business playbook. Experience can be a great help, but actually you need to also employ some trial and error. 

In my experience any start-up should bootstrap till they have a clear idea of their playbook. Keep costs initially to an absolute minimum and try to find out what works (and equally valuable, what doesn't). The most interesting element of any business plan is where you've tested a few key theories at local level or on a limited basis. You've proven some and discounted others and you have developed a few relevant case studies to demonstrate this. Once you know what works for your business, for your brand and, critically, for your target audience, then you can justify where to spend the big money. And then you can raise the big money. Once you know your playbook, by all means, go big.

This has always been the case - but now there is a new element at play. Investors not only understand the above but the windows available to prove that your playbook works have narrowed significantly. Now there is a much greater focus on profitability - or to be more exact, on achieving break-even.  

Growth is good and for most early-stage businesses, it's all about revenue land-grab. EBITDA has had to play second-fiddle. If an entrepreneur aims to sell their business 5 or 8 years following launch, a revenue multiple was often favoured over that of EBITDA. This is mostly  still the case but long-gone are the 3-5 year business plans consisting of cumulative losses. In order to "invest ahead of the curve" and invest in growth, shareholders funds are still required to fund early losses. But investors' horizons have shortened. Businesses which can demonstrate at least  breakeven within the early years are now attracting the preferred investments. And by "preferred investment" I mean at attractive valuations to the entrepreneur. The insane valuations of recent years appear to now be few and far between. And the best valuations are following business which have already, or are predicting to break-even sooner. In fact, many businesses without a very definite short-term path to break-even aren't getting funded at all. Breakeven is now in fashion.