Navigating the investment landscape – three questions your startup should ask

In 2023, the UK’s startup ecosystem was valued at just under $1 trillion, making it one of the most valuable in the world.

While the potential of the market is encouraging, raising money still comes with some significant challenges. In the last two years, the market has only become more complex – competition has increased, and timescales have lengthened as investors carry out more rigorous due diligence.

This can feel deflating for founders who, under pressure to secure cash, can be tempted to take the highest level of investment or valuation as quickly as possible. But this isn’t always the best strategic route. Here, Gordon Bateman, founder of Investor Ladder and investor event Climb24, outlines the investment options that founders should be considering, and how to find the right fit. 

What kind of investment is right for you?

If you want to secure funding, the first step is to clarify exactly what you want that money for. Raising money to manage cash flow is very different to raising for growth and will steer you in a different direction so being clear on this is important. There are multiple paths to explore, and no option should be off the table. But, to make an informed choice, I always recommend that founders surround themselves with people who have lived experiences. 

We worked with a first-time founder who had closed a friends and family round which helped them to grow the business by 50%. Match funding from an Innovate UK grant allowed them to then carry out more high-risk development which created further value. Grants, which can be worth up to £5m, are a great entry point and, like this business experienced, can put you in a stronger position for future investment. 

Combined authorities also offer a range of funds and programmes, ideal for those looking for sector-specific support. These are often for smaller amounts but can be just as valuable.

Equally as important as the type of funding is who that investment comes from. It’s a relationship that is not unlike a marriage and you need to ensure that any partnership is with someone you trust, who you are culturally aligned with and who you can see a future with. Here are three questions to help navigate the courting stage. 

What’s their track record?

Do your homework and take the time to understand what their track record looks like. They may have a wealth of experience in your sector, but have they helped someone like you achieve the same goal? Also ask what they can bring aside from money. While the investment industry is regulated, the business support community isn’t, and we’ve seen a huge rise in consultants, some of whom are brilliant and others less so.

Also look at the longevity of their past relationships. Raising money involves multiple steps and as soon as one round is raised, you’re looking to the next. Can a first-time investor follow some of the money and reinvest a second time around? Being able to demonstrate confidence and belief is especially important to anyone new you may be approaching for additional rounds. Finally, how well connected are they? Are they known for being able to facilitate meaningful introductions?

What’s the expectation?

It’s easy to forget that taking on investment often involves giving away a part of your business. Investors hope to get a cash sum back eventually, but what else are you giving them in the meantime? It’s vital to understand what their expectations are early on. Do they want to have a seat at the board for example? If they have a controlling influence, how might that impact decision-making?

This is also true when thinking about the direction that the business is moving in. When raising finance, founders can invertedly ‘big up’ certain elements of the business plan or alter it to make it more attractive to investors. However, this can result in misalignment later down the line so it’s important that you’re transparent and realistic from the start. 

Are you approaching them at the right time?

Lastly, look at where that fund is in its lifecycle. It typically takes five years for organisations to spend any investment and another five years for investors to make it back. Where are they in their lifecycle and does it align with your timescales? Depending on whether you’re raising a first round or looking to exit the business, the timing may be off and you may be better looking elsewhere. 

Navigating the world of investment can be daunting. By asking the right questions upfront however, startups can ensure they are carrying out the right due diligence and entering into a mutually beneficial relationship that is about more than just money.