Getting to "yes" in a world of "no"…

The Startup Handbook

This tiny handbook aims to tell you all the important stuff you need to know about starting and funding your own business in the UK – not how things ought to be, but how they really are.

(1) Forget about external finance. Build your company instead.

Most startup books advise early stage entrepreneurs looking for startup funding to consider approaching venture capitalists (“VCs”). Well, it’s true that the UK does have plenty of reasonably active VC funds: but be warned that almost none of them treats “seed” or early stage startups as viable investment targets. So please don’t waste a lot of your valuable time and attention on VCs.

Alternatively, those same books suggest you approach cash-rich individuals (“business angels”). While it’s true that there are plenty of these in the UK, there are extraordinarily few “lead angels” – angel investors with the skills, experience, confidence and free time to do due diligence on your proposal, negotiate terms with you, and then lead and coordinate an investment round. Rather, you’ll mostly meet “passenger angels” – people who aim to put lots of small (£5K – £15K) lumps into investment rounds led by lead angels. Being brutally frank, until you start meeting lead angels, a slightly more pragmatic word for ‘passenger angels’ is timewasters. All the same, bearing in mind they might possibly introduce you to a ‘real’ (lead) angel they happen to know or have previously co-invested with, it’s not a bad idea to keep talking… just don’t expect it to go anywhere.

In practice, though, you have to understand that almost all UK lead angels have essentially no interest at all in ‘high concept startups’ – that is, companies who have a fantastic idea but not much else. The reality is that they’re more interested in finding dead certs and investing in them on hugely favourable terms. Given all that, the first question you need to be answering is…

(2) How can I make my startup a “dead cert”?

This, of course, has no universal answer. But I think practical answers tend to cluster around one of three basic plans:-

Plan A: make money by selling stuff to customers. It doesn’t have to be expensive stuff, just stuff. Unfortunately, lots of entrepreneurs are what Sweary Dave McClure calls “wantrepreneurs“, wannabe entrepreneurs without a sales bone in their body, when 90% of entrepreneurship is sales, not technology. So, actually selling things convincingly demonstrates that you’re not a ‘wantrepreneur’.

Note that this same idea scales up. Imagine an investor (or indeed a bank manager) looking at two companies, where one is purely conceptual (i.e. “it’s LinkedIn For Dogs“), while the other is no less ambitious in its own way but actually making a certain amount of money now. Which is the dead dog, and which is the dead cert?

Plan B: build up a huge audience by giving stuff away. It doesn’t have to be devastatingly useful & practical stuff, just cool. Book publishing has swung around to this model over the last decade, because trying to publicize a book you’ve already written is basically the bozo way round. Rather, you’re much more likely to be successful by giving text away (blogging, newsletters, interviews, etc) to build up an audience first, and only then writing a book aimed precisely at that audience. Hence you can think of blogging as the front end of a “Freemium” book publishing model.

Of course, business plans and presentation decks that merely talk about gaining a ‘large customer base’ are just vapourware / slideware: any old (or indeed young) fool can draw a J-curve in Excel. However, going out and actually building up a genuinely massive audience and engaging with it is still a mark of talent, possibly even genius (coupled with more than a smidgeon of luck). Though the implications of a million-strong registered user base still bemuse bank managers, most angels find them positively mouth-watering. How close to that figure can you get?

Plan C: build up a relationship with a single, huge über-customer and focus on finding multiple ways to satisfy its precise needs, almost to the point of obsession. OK, it’s a high-risk, all-or-nothing B2B strategy, but bank managers (and indeed quite a few angels) tend to like it a lot: for if you’re not personally a B2C sales monster, it can be extremely hard to build up proof that you’re getting closer to making any money from a diffuse set of possible mid-size buyers.

All in all, the point of these plans is to grow and develop your startup to the point that it becomes a ‘dead cert’, at which time suddenly everyone wants to put money into it. The Zen-like paradox of startup investing is that people only want to put money into things that don’t actually seem to need their money.

But now that you understand that you’re unlikely to get external investment or significant lending during this “dead cert-ification” phase, it should be reasonably clear that the proper question you need to answer is…

(3) Where’s the money coming from to make my startup a dead cert?

Given that it’s not from angels or VCs, the short answer is almost certainly your personal savings, plus possibly any family members (or indeed friends) who’ll lend to you or invest in your startup – but always document in writing whether it’s debt or equity and on what terms. Take proper advice if it’s not utterly transparent, otherwise it’ll probably end in tears.

As far as banks go: until such time as your startup has turned over a decent amount of money, you almost certainly won’t be able to borrow significant sums from them. However good your personal credit rating is, it’s your company that would be borrowing it here, not you. And beyond a certain level (say, £25K or so), banks will also want personal guarantees from the directors… I’m just the messenger here, don’t shoot me!

Otherwise, just about the only other thing you can usefully do is “bootstrap”, which is normally a fancy way of saying “do paid consultancy work for other companies part-time while you try to build your own“. But never forget that your key aim is always to produce a self-sustaining company built primarily on sales, not purely on Intellectual Property pixie-dust (which almost nobody can afford any more). Don’t get me wrong, IP is a great long-term way of building a large company (I have patents myself), but it’s an even greater short-term way of bankrupting a small company.

(4) What should I build during that phase?

What I’m saying here is that I think you’ll almost certainly be 10x better off using your ingenuity, time and your resources (however meagre!) to build cool things and sell them to lots of people than investing a vast amount of your time and effort in pursuing potential investors. But what should you be making?

Some people will tell you that you should build a Minimum Viable Product, which is trendy startup jargon for a stripped-down version of what you’re hoping to build longer-term, but in effect released part-way through its overall development cycle. However, this often (in my experience, at least) takes much longer and costs much more than can be realistically self-funded. Not only that, but trying to pass off late prototypes as early products takes far more risk with your long-term credibility and reputation than you might think. If your company is a pure software play, then maybe – just maybe – this kind of ‘Lean Startup’ hack can be practical. But if not, bear in mind it can just as easily be disastrous – not everything is software.

A more realistic approach is to think about what I call the Minimum Buyable Product for your market. Never mind trying (and in fact probably failing) to build a minimalistic version of what you ultimately would like to sell, what is the smallest thing you are actually able to sell right here right now? Use your ingenuity to make, source or adapt small things and then keep on selling them, until you’ve built up a workable ongoing business. Remember that entrepreneurship is primarily a sales job: and if you don’t like the sound of that, I’m sorry but you might just have made a bad career move!

By selling your Minimum Buyable Product, you should be able to build up a customer base, a market presence and investor credibility, as well as (most importantly of all) a largely self-sustaining business that isn’t draining your savings: all of which frees you to move on to building your real product. You may be pleasantly surprised by how well your Minimum Buyable Product does for you, and change your longer-term plans accordingly!

Overall, think really small, act really fast, and stay really responsive: apply your ingenuity, cunning and perseverance to devise ways to keep going & to keep growing your startup. If you do this and build it up into a workable, self-sustaining company, then before very long you’ll see that investors will – almost magically – start to come to you. And that’s how it should be! :-)

Comments on: "The Startup Handbook" (9)

  1. Great realistic post on funding for a UK startup.

    You’re right, success is mainly about the selling / marketing

    Refreshing to find an article that’s UK-focused and blunt about how hard it is

  2. Hi good solid advise when I tries to build business in the UK 20 yrs ago I wish someone had been lavishing me with such wisdom! – two ‘things/area’ in my opinion worth adding, 1. don’t try and do it alone – you need a support network and partner or two…also its a long and usually bumpy road 2. make sure you are working in your zone of genius. In our work with US startups to help with this last point we have launched the free – Discover your entrepreneurial zone of genius (EZOG) – at myezog.com would love you to give me some feedback – cheers Michael

  3. [...] Funding Startups (& other impossibilities)Great realistic post on funding for a UK startup. Success is mainly about the selling / marketing. Refreshing to find an article that’s UK-focused and blunt about how hard it isTweetExcellent Advice for any UK Startup ‘The Startup Handbook’ http://bit.ly/st8bmf #Startup [...]

  4. I know the post is from quite some time but I found it very realistic, what’s more, I think you are telling the truth that others don’t want to tell.

    I don’t know if it is because here in Europe there is different concept, but it seems from reading some books and blogs that you’ll find funding right away without no problem. They are talking about tests, and teams, but…most of the time is your money and your time and you alone trying to push a new project forward.

    Great work!

  5. Paul Farmer said:

    Hey Nick,
    That’s 2 for 2.
    I also read your article about the 10 reasons Lean Startup model sucks.
    While there are some areas that could be argued, overall I think you are bang on.

    I’ve been helping R&D companies in NS, Canada get R&D tax credits for about 18 years.
    I recently return enrolled in a new Masters of Technology Entrepreneurship & Innovation (MTEI) program at a local NS university.

    Through the course I met a couple of engineering fellows ( I have a business & CMA background). The upshot is that we’ve in the middle of creating and launching a new video sharing company.

    It’s a whole new world when you are on the other side trying to plan the tech development and stretch your seed funding. Fortunately there are a few government programs that we might be able to access to help us a bit.

    While I 100% agree with your comments about finding something to generate revenue to help support ongoing core technology development, perhaps there are some similar R&D support programs in the UK that might be available to help with staff costs?

    Hope things are going well.
    Thanks for taking the time to write and share.

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