Overnight, they both came to the same conclusion. They rejected an offer of investment. The firm wanted to pump capital into his fledgling online health business. But Lopo was wary of the venture capitalist.
The rejection would end a first-round of seed funding which pooled £1.5 million into the start-up. Five investors had backed the business in 2008.
For Lopo, big VC firm funding was a no-go at the time. He spurned proper venture capitalist backing until his third round of funding.
“It’s the kind of fund everybody bites their hand off [for]. And every part of me wants to say Yes – take money,” he said.
He rebuked the seed-offer because his small start-up didn’t matter to a giant global fund. “Whether we did well or not was irrelevant to their fund, and unless we were Facebook they just weren’t going to care,” added Lopo.
“We said No and they said: are you crazy?”
Their rejection didn’t plunge the company into crisis. In the six years since, Wahanda has ballooned into a huge online network of beauty and health businesses.
Founded on Valentine’s Day in 2008, the company today connects users with more than 4,000 salons and spas across the UK. Their Series B funding round banked more than £5 million and the business is backed by Skype’s founding engineers.
Wahanda is one of a legion of companies that have spurned early-stage VC funding. Start-ups have grown skeptical of institutional investors and many are instead turning to crowdfunding platforms and incubators to get off the ground.
Crowdfunding has captivated entrepreneurs. In 2011, $1.5 billion was raised for one million projects, according to the Crowdfunding Industry Report, and crowdfunding platforms raised a further $2.7 billion and successfully funded more than one million campaigns in 2012.
The frenzy shows no signs of abating. In 2013, $5.1 billion in crowdfunding transactions occurred globally, according to Massolution, a crowdfunding research and advisory firm.
The World Bank predicts that the entire industry could reach $300 billion by 2025. Online platforms such as Crowdcube, Kickstarter and Indiegogo offer entrepreneurs a lifeline when balance sheets are squeezed.
The benefit is that start-ups retain more equity. Those that grow successfully will enjoy more reward at a later stage.
Greg Rogers, managing director of Barclays-backed accelerator TechStars, said: “When you take on VC money there comes a price, and that price means all the less money in your pocket for all the more hard work you’ve done.”
MBA graduates see the potential. “Although I tried to look for investors for the initial plan in 2010, I lacked credibility because I came from the construction sector,” said Corrado Accardi, who founded Pizza Rossa Ltd last year.
His start-up raised £440,000 from over 120 Crowdcube investors, setting a record for the largest amount of crowdfunded equity raised for a UK upstart at the time.
Corrado, who studied an MBA at London Business School, will use the cash to open 12 pizza-outlet-franchises in London over the next five years. “But the reality is that when we start franchising, there are no limits,” he added.
While some crowdfunding platforms take equity, it is still a preferred option.
James Pattison, CEO of Start Up Direct, which supports UK SMEs, said: “With platforms such as Crowdcube… a lot of these businesses are raising the funds they require, but giving away less equity than they would with angel investors.”
Harry Hill, founder of the listed online real estate firm Rightmove, posed for a photograph inside a tech-city incubator. On the floor below, a dozen start-up entrepreneurs tried to avoid the flash.
Next to him stood Meg Hillier, the UK MP for Hackney South and Shoreditch –including East London’s tech scene – and a gaggle of start-up experts.
It was the official opening of LaunchPad Labs, and Harry was providing some stardust to the incubator’s growing band of tech-heads. Early-stage funding was top of the agenda.
As banks have cut back on lending, start-ups have had to look elsewhere for capital. Accelerators, which are less able to absorb risk, often fill the gap. Meg, a Labour and Co-operative MP, said that banks have taken away facilities from businesses and the poor.
“Those people are being driven to borrow money at higher rates elsewhere because you can’t get simple, small personal loans from banks,” she added.
Stuart Thomson, a business advisor at Start Up Direct, said that banks do not loan to firms under two years old – start-ups. Since 2012, Start Up Direct has helped 500 SMEs, said CEO James. The organization is the direct delivery partner of the UK government’s Start-up Loans Scheme – an initiative that provides loans and mentors to entrepreneurs. The scheme has dished out £1 million in funding so far.
Others argue that it is becoming more competitive to secure funds and bolster coffers. Yet in London’s Tech City and the rest of Europe, the venture capital industry is behind Silicon Valley’s offering.
Other up-starters are putting their faith in angel investors. Networking has never been more important for MBAs.
Sarah Turner, a dealmaker on the UKTI’s Global Entrepreneur Programme, said: “It’s a relationships business. Start speaking to them [angel investors], call on your friends first [and] get introductions because, for all we want to make it a fair world, introductions from people you know will always go to the top of the pile.”
The reality is that some small business owners are afraid of venture capitalists. It is understood that entrepreneurs therefore feel compelled to develop close relationships with members of VC funds. Establishing trust is paramount.
“The most important thing to consider, whatever funding route you go, is alignment with your investor, because unless your goals are matched its going to end up in disaster,” added Sarah.
Other start-up advisors are more bullish. Some warn that big VC funds will not care if your start-up goes out of business – they are just buying options in multiple companies.
“Make sure that when he [an investor] goes through this deal, if we go bust, he has a problem with his partnership and his investors,” warned Carles Ferrer, a general partner at Nauta Capital.
It did not take long for Adrian Lloyd to get onto credibility. The co-founder of Episode 1, a VC firm he launched after an MBA at the Stanford Graduate School of Business, was taking questions from a gutsy crowd.
A bevy of MBAs, entrepreneurs and investors had gathered at IE Venture Day in Central London to swap business cards and talk up the start-up market.
“We don’t want to see companies that really haven’t raised any money at all in any other way,” said Adrian. “If you haven’t raised money through angels you probably haven’t been able to achieve product-market-fit, and are probably not ready for VCs,” he added.
For entrepreneurs who want to bank VC capital, there are several benefits. Many VCs, Adrian pointed out, will do follow-on funding – or will be able to introduce you to other investors at a later stage.
Raising large amounts of capital is a particular concern for tech start-ups, which often need sizable investments to even launch their products.
For Greg, whose firm TechStars typically provides $118,000 in investment for 7% to 10% of company equity, a strong team comes above all else during pitches.
He said: “The greatest companies I’ve ever seen [which] come out of investment stage are the ones in which the team is amazing, but you’re sitting there thinking: how an earth will they pull this off?”
Start-upers are wary of venture capitalists. But Lopo, meanwhile, who accepted backing from VC firm Fidelity Growth Partners for his health business, remains defiant.
“It’s important to remember that capital is spongeable,” he said. “Capital is capital. It doesn’t matter where it comes from.”