Scott Houghton, partner at venture capital firm Envestors, gives some advice to a pre-revenue, London-based technology start-up, with a product not yet developed, seeking angel investment up to £1m
The start-up says:
We have spent 18 months and £20,000 of founders’ investment researching and developing the architecture for a new mobile phone data security application. Today the product concept is at pre-prototype concept stage. We are seeking to raise up to £1m to develop and fully test a beta prototype and then to fully launch the product. Beta development is estimated to take up to six months, and if successful, we expect to be able to bring the product to market 12 months later. We think angel investment is the way ahead. Would you agree? If not, what would you suggest?
Scott Haughton says:
Currently what you have is a good idea, but a wholly unproven concept. It is unlikely you will attract any angel investors at this stage of your company development because the risks are far too high. You don’t yet have a working, proven product or a solid sales pipeline and you are at least 18 months from generating revenue. You also need to spend time building an experienced, well-balanced management team.
Furthermore, it is highly unrealistic that you will be able to raise £1m for a pre-revenue start-up. Assuming that you do not want to relinquish control of your company, raising £1m in return for say 50 per cent equity, implies a pre-money valuation of £1m and a post-money value of £2m. This is way outside what the market will bear. Normally pre-revenue start-ups command pre-money valuations in the range of £350,000 to £750,000.
You also state that you require £1m total funding to develop the product, test it and then launch it. However, I would not recommend that you raise all your funding in one tranche—instead, do it in stages. Start with securing research and development (R&D) funding and incubator support. This approach is more achievable and, in the long run, will ensure you can command a higher market valuation in the future.
Your best option would be to seek to secure a grant to assist fund the required R&D. As a London-based technology company, you may be eligible to apply for R&D grants, ranging in size from £2,500 to £500,000 from the London Development Agency
Posted 22 November 2007 : Director.co.uk