The myth and the mystery of the fundraising process
10/01/2020 by The Red Tree
This article is written by Shing Lo and Max Latchmore, venture capital lawyers in the market leading venture capital practice at international law firm Bird & Bird LLP. Shing and Max work with their clients to help turn ideas into reality. In particular, Shing and Max help fledgling companies take their first steps into the business world, providing insight into the world of investment fundraising.
From a founder’s perspective, the process of raising funds to fuel the brainwave can resemble a black hole of Eventbrite tickets, template introductory emails, and speculative coffees with that friend of a friend of a friend. This article will unpick some of the myth and the mystery of the fundraising process and provide you with a renewed sense of optimism around the possibilities of launching your beauty business.
Getting by with a little help from your friends
Typically, a company’s first injection of investment will be from a familiar source. Alongside personal investment from founders themselves, early stage companies are often funded with the support of family and friends. These sums are rarely substantial, but can be vital in financing that first website, that initial R&D or that first product.
Family and friends’ investments are often procured on simple terms as the individuals concerned are not simply motivated by profit; they are rooting for your personal success too. Furthermore, where such investors are seeking to rely on SEIS or EIS, the investments tend to be in the form of ordinary shares. In contrast, venture capitalists’ money comes with terms such as preference rights, minority protection rights and commitments from the founders and the company.
Stand out from the Crowd
Crowdfunding platforms have also become a very popular source of early stage fundraising particularly for consumer based businesses. Platforms such as Crowdcube and Seedrs provide companies with a forum to market to retail investors (i.e. individuals rather than corporate wealth), who are also potential future customers. The collective force of 500,000 investors in one place quickly adds up.
The downside of taking investment from a crowd-funding platform is the administrative burden that this can place on a company. For example, you may want to offer pre-emption rights to your shareholders (which is, broadly speaking, a right of first refusal over any new shares issued). This would be a simple process where you only have 5 shareholders who are all family or friends but this becomes significantly more challenging where you find yourself with 350 – 400 shareholders, each holding an infinitesimal percentage of the company. As crowdfunding platforms do recognise this issue, we suggest exploring with your preferred crowdfunding platform the possibility of using a nominee structure to help ease the burden of managing a large crowd of shareholders.
Easy as A, B, C
Once a company has launched and is showing signs of traction (or potential traction), the next stage of a company life cycle is obtaining sufficient funding in order to grow. For example, imagine your brainwave is a face serum. You are currently creating the serum by hand, and in order to grow you need to take on investment to outsource the manufacturing.
At this point, you may wish to consider engaging with a venture capital fund. These funds often provide value beyond financial investment, which can be of great use for a young business in need of business guidance and connections. The sums invested will usually be substantially larger than those invested at family and friends stage, and as such venture capitalists will ask for larger portions of equity and more extensive protections than were provided to your family and friends.
Trading equity for funding is an inevitable part of your company’s lifecycle, but it is important you do not give away too much equity too soon. Ensuring you have experienced legal representation in discussions over your Series A, B and beyond, is vital to ensure the company’s investment documents are appropriately set up not to impede future financing rounds and growth, and the founders continue to have the ability to steer the strategic direction of the company.
Ensure that your share capital structure is up to date. It is not uncommon for companies to promise shares to employees or advisors without documenting anything or seeking tax/legal advice. It will be difficult to update this once term sheet discussions have begun, and investors will be unimpressed by founders who have not managed their shareholder base appropriately and may be unnerved by the prospect of issues they are not made aware of.
Familiarise yourself with cap tables and ensure your register of members is up to date. These are the two documents which an investor will always want to see. A cap table is a visual representation of your company’s shareholding pre- and post-investment round. A register of members simply documents who holds shares in the company, what shares they hold and when they took ownership of the shares. A shareholder is not legally a member of the company until they are added to the company’s register of members, so keeping this up to date is essential in providing an accurate representation of your company to investors.
The Red Tree is the UK’s leading international beauty brand consultancy and a powerhouse of ideas, insight and inspiration. For an informal discussion on how we might help you, please contact us.
Middle East Beauty Hub
Explore our series of articles uncovering the intersection of tradition, innovation, and regulation within the nuanced Middle Eastern beauty markets.
Female Founders: The Lip Gloss Gap
Our series of articles highlighting how the UK beauty industry plays a vital part in closing the female fundraising gap.
New to the beauty industry? Our Founder Hub series brings together an array of articles covering topics from the costs of starting a new brand, to our recommended branding agencies.
Meet The Team
Get to know each of The Red Tree team members with our interview series. From our favourite campaigns to tips on how to enter the beauty industry.
Our series of articles exploring our fitness test for beauty brands. The unique RaceFit™ questionnaire allows you to quickly review the 7 building blocks crucial to brand success.
The Beauty Accelerator™
Read our series of articles focusing on The Beauty Accelerator™, which sees one emerging independent beauty brand receive equity investment plus the knowledge and expertise of The Red Tree.
Is RaceFit™ for me?
Is RaceFit™ right for my brand?
RaceFit™ assessment is beneficial to any brand at any stage of their journey. If you are: - A start up looking for direction and guidance - An established brand seeking an overall ‘health check’ - A brand in crisis urgently seeking direction on priorities - An international brand looking to expand into the UK market - A brand ready to take their ‘next step’ looking for guidance in preparation for growth, international expansion or expanding distribution then RaceFit™ is for you!
What if I am unsure of how to answer a question?
You should answer honestly and instinctively. Very often your initial response will be the most accurate. If you don’t understand a question, or are having difficulty knowing how to answer questions please do get in touch.Contact Us
I am based outside of the UK, can I complete RaceFit™?
Yes, the RaceFit™ self-assessment programme is entirely virtual so you can get started straight away, no matter where in the world you are.
Any company entering The Beauty Accelerator™ competition must be based and registered in the UK.
The scheme by which investment into the winning brand will be made is the Seed Enterprise Investment Scheme (SEIS). You must be eligible for SEIS to enter The Beauty Accelerator but you do not need to be registered for SEIS. You can be in the process of applying for SEIS and receiving Advanced Assurance from HMRC, which is free of charge to obtain and certifies to investors that the criteria necessary to qualify for SEIS have been met by the company at the time of the application. You do however need to be SEIS registered at the point of investment.Click here For further information about SEIS
As is the case with all equity investments, the winning brand must be willing to provide equity stakes for both SFC Capital and The Red Tree. In addition, the winning brand might be required to pay a monthly fee for the duration of the 12 month period of assistance from The Red Tree. The size of the equity stakes for both SFC Capital and The Red Tree are unknown at this stage and will be based on the valuation of the business at the time of investment. The value of the monthly fee to The Red Tree will be determined by the scope of work required by The Red Tree and will be agreed in consultation with the winning brand. The equity stake, monthly fee and scope of work will be discussed in further detail with short listed brands during the interview stage.
Brands that applied for The Beauty Accelerator™ 2022 can apply for The Beauty Accelerator™ 2024.
Applicant brands should ideally have proof of concept – the business should ideally be in operation with at least one product currently retailing on the market, an existing website in operation and a number of months of trading.
Under exceptional circumstances, brands that are at concept stage will be considered.
There should be a team in place or a willingness to take on a co-founder at an early stage.
A business plan must be in place and submitted as part of your application to demonstrate the revenue that can be delivered.
The business should not be valued at more than £1,000,000.
All R&D should be completed as funds invested will only be used for marketing and commercial activity.
If you are short listed, you must be available to attend the virtual shortlist interview. It is likely that short listed brands will be required to attend more than one virtual interview.
If you are a Finalist, you must be able to attend The Beauty Accelerator™ Final, either virtually or in-person.
You cannot apply for or already be in the process of applying for another accelerator or incubator during the period December 2023 to December 2024.
If you are selected as a finalist, and if you go on to win The Beauty Accelerator™, you must agree to exposure of you and your brand through The Red Tree’s, SFC Capital’s and Freeths online and social channels and a possible marketing campaign.
Confirmation of the winning brand is subject to SEIS eligibility confirmation, agreement on equity stake and The Red Tree fee, and completion of due diligence.
"*" indicates required fields