It is often said funding for most early-stage businesses comes from the “three Fs” - friends, family and foolish investors. All jokes aside, it remains the case that high-risk, early-stage, pre-revenue – yet also innovative – businesses require investment. Where can they go to raise funds?
“For a very early-stage company, particularly one that is pre-revenue, conventional bank finance is rarely an option,” says Martin Murray, chief executive of Furthr. The funding, he notes, tends to come from founders themselves, friends and family, angel investors, specialist seed funds and, increasingly, accelerators and State-backed sources of finance.
“The challenge is that these companies are being asked to fund the period when the risk is at its highest – they may still be proving the technology, validating the market or building the first version of the product,” Murray says. “Having a good idea is not, on its own, enough to raise capital.”
According to Claire Carroll, head of venture funding at Enterprise Ireland, the most important step for companies setting out to seek funding is ensuring that they are investor-ready. “Companies risk becoming disillusioned by rejection if they set out too early, before they have thoroughly brought their business plan together,” she says. “They need to be aware of what gaps they have, and how they will fill them.” Early-stage investors are not looking for perfectly formed companies, she adds, “but they are looking for informed teams”.
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Fundraising should be viewed as an essential part of company-building, rather than purely a capital-raising exercise, says Tom Early, head of new investments at Enterprise Ireland. “Early investors often bring networks, expertise and credibility,” he explains, adding that founders can often “overlook” strategic investors, industry partners and early customers who can provide validation alongside funding.
The good news, Carroll says, is that Ireland has a well-connected ecosystem that can support the early-stage company in its fundraising efforts. “Enterprise Ireland’s client advisors are well placed to direct client companies as to the most appropriate sources of funding for them.”
Furthr, previously known as the Dublin Business Innovation Centre, helps founders get ready for investment. Although it provides practical help for companies seeking to navigate State funding and connects founders into angel and venture capital networks, Murray emphasises that the objective is not simply to help a founder raise a round. “It is to help them build a proposition that is capable of attracting investment and, ultimately, developing into a sustainable and scalable company.”
State funding, he says, can help a company demonstrate that the technology works, establish whether there is a market and build enough evidence to bring private investors to the table. “These schemes matter because private investors will not always take the very earliest risk on their own.”
Enterprise Ireland programmes include feasibility funding, the Pre-Seed Start Fund and investment for companies that meet the criteria to become high-potential start-ups (HPSUs). The New Frontiers scheme also provides an important route for founders who are still developing and validating their proposition.
Carroll adds that the Employment Investment Incentive Scheme (EIIS) offers tax incentives to private investors who can reclaim up to 50 per cent of their investment into a start-up company.
Nicola McClafferty is a partner at Molten Ventures, a leading venture capital (VC) firm investing in and supporting rapidly growing technology companies across Ireland, the UK and Europe. She says this type of funding is generally suited to high-growth businesses with the potential to become very large companies, particularly in technology and other innovation-led sectors.
“These businesses are still often loss-making, as they invest in product and R&D and carry significant risk, but they are targeting large markets where success can generate outsized returns,” she explains. “As an investor type, it is therefore not the next step for every growing business.”
Institutional VC can come into play from the very early seed stages but often after a business has secured initial early-stage funding from angels, friends and family, or grant funding, McClafferty adds.
“Raising VC typically means selling a minority stake in the business in exchange for VC investment, and investors often also take a seat on the board,” she says. In doing so, founders are committing to pursuing a significant growth outcome capable of generating a substantial return on that capital, potentially 10 times or more. “In return, a good VC partner should bring more than just money, and provide access to talent, customers and global networks, as well as experience in scaling and expanding internationally.”
However the funding comes, Murray says it is a crucial psychological boost for any fledgling business. “For an early-stage company, that first external investment can provide the runway to prove the proposition, win the first customers and generate the evidence needed to unlock the next round of funding.”
