Future founders series: tips on turning a business idea into a real business
19 August 2019
A recent report published by Octopus revealed that of the young people surveyed (aged 14-25) just over half (51%) had thought about starting, or have already started, their own business. We want to do more to encourage entrepreneurship, and give ‘future founders’ every chance for success, which is why we’re giving would-be entrepreneurs the knowledge and insight they need to help them take the first steps to start their own company.
Having a great idea for a new business is just the beginning. You’ll need to find out whether it’s worth investing time and money in. We asked George Whitehead, Venture Partner Manager at Octopus Ventures, to tell us what investors look for in a start-up idea.
Can the idea be turned into a viable business?
Investors are interested in more than the idea itself. They want to know about the person or people behind it. As George explains, “most investors want to see that an entrepreneur has got the passion and resilience to build and grown a successful company. It’s easy to underestimate the stresses and strains, ups and downs, involved in being a start-up founder. But without that passion, you simply won’t survive the bad times.
“From our perspective, a successful entrepreneur needs a ‘magnetic quality’ about them to attract other really talented people. We look for whether the founder can sell a vision or an idea. And whether they also recognise that building a business from the bottom-up is going to be a team game over the long-term’’.
Commit your ideas to paper
Even if your idea is still in its very early stages, you still need to explore whether it’s feasible. The best way to do this is to start writing it down. Taking the time to consider the ‘what, how, where and who’ associated with your start-up will never be time wasted. Not only will it help give clarity to your thoughts, but it’ll put you on the front foot when the time comes to explain your thinking to others.
Here are some of the key elements you might want to start writing about:
- Your elevator pitch: this is your business idea told in just a couple of sentences. It’s about thinking big and grabbing someone’s attention instantly.
- Your origin story: all the best companies have a story behind them, although it could be just as simple as explaining how you thought up the business idea in the first place.
- Your executive summary: this summarises everything, clearly and succinctly, in your business plan. Don’t worry, we’ll be discussing how to create your business plan at a later date.
When it comes to funding, show initiative, and shop around
As you begin to explore and validate your business concept, you most likely rely on your savings, money from friends and family or even credit cards. It’s unlikely you’ll access a lot of money by ‘bootstrapping’ this way, but you keep control, and you’ll probably have flexibility about paying the money back in a tough month.
George says, “most people will get friends and family in at the very beginning, as they’re testing the waters. It can be really hard going out to people close to you because you’ll probably be more concerned about losing their money than they will be. But when people feel confident that what you’re doing is convincing, compelling and worthwhile, they’ll be investing for all sorts of other reasons”.
Octopus started this way in 2000. Of the initial investors who provided the necessary capital to launch Octopus, a significant number were family members or friends from university. Octopus’s founders were passionate and articulate about their vision, and their persistence paid off for everyone who invested in them. Simon recalls, “We had no money and only two years’ work experience. We rented a tiny office space above a shop in London and spent the next 12 months on the phone, trying to raise the funds we needed to get started”.
Scaling your business
Once you’re ready to start building your business, you’ll probably start thinking about broadening your search for funding. This could mean talking to different types of potential investors, or considering other financing options. The good news is that today there are lots of different ways to access capital to help launch a start-up, including secured and unsecured bank loans; business incubators and accelerators run by VCs, governments or corporations; microfinance and raising funds against product pre-sales.
Crowdfunding can raise larger sums of money from lots of individual contributors. Share your pitch on your chosen platform and choose whether to offer an early version of your product or equity in return. It’s usually very competitive, but you keep business control. It can also be a great marketing opportunity if you turn those early users into your advocates.
Angel investors use their own money to fund other start-ups. They might be entrepreneurs themselves or retirees who want to keep a hand in. They are often happy to take big risks, and they usually expect significant returns. Typically, they’ll get involved, so you get access to their experience and their networks.
Angel investors are frequently looking for some significant involvement in the business. George notes angel investors don’t necessarily want scale, “they might be quite happy looking for a business that might one day be worth five or ten million pounds because they can have a meaningful stake in that company and earn a substantial return”. An angel investor might be your ideal partner, both from a funding and mentoring perspective.
Be honest, with yourself and with others
As George explains, “whoever you choose to talk to, expect to be grilled on the fine points of your business and be asked for lots of data and information. Different types of investors will look at things very differently. They’ll be interested in all sorts of metrics. They’ll be looking at risk and reward, time and liquidity. Some might be looking at hands-on involvement, and some will be desperately keen to be hands-off with their investments. Choosing the right sort of funding is certainly not a decision to be taken lightly”.
Venture Capital (VC)
These funds look for businesses with huge potential, ideas scalable to £100s of millions. They invest and stay until a start-up is ready for Initial Public Offering or acquisition. As with angel investors, they offer mentoring and support to keep you on track, increasing your chances of success. You’re likely to lose significant control in exchange for the VC’s stake, and few start-ups have the scale to appeal to VCs.
Octopus Ventures has one of Europe’s largest VC teams, dedicated to backing the best entrepreneurs the UK and Europe has to offer. “We want incredibly talented people who have extraordinary ambitions – entrepreneurs looking to change the world”, George explains.
“Octopus has backed companies in the very early stages. They’ve been so compelling about the opportunity that it’s made us want to get in early. But most VCs will want to see proof there’s something exciting happening about this opportunity. They have to see the potential to scale.
“A VC will want to see ‘We’ve got these many customers, we’ve got these sales figures. It can also be how enthusiastic buyers are about the brand. Maybe a business hasn’t made many sales yet, but the people they have sold to are huge advocates. What you need to pull together for a VC is that story that says, ‘there’s a really big opportunity here’”.
What are companies like Octopus hoping to find?
George explains: “We want to see bold and diverse ideas. Octopus is looking for companies that can change the world, but often, starting small and learning the ropes is a really sensible way to go about it. An awful lot of entrepreneurs have their first business, go into their second business, go into their third business, and each time they scale up and increase their ambition.
The simplest way to better understand investors, George believes, is to approach them and discuss your ideas. “Don’t be afraid to reach out and ask your networks. I never cease to be amazed at how the vast majority of people are helpful and supportive. Entrepreneurs and investors should talk to each other much more to compare notes, seek advice and ask for help.”