Successful entrepreneurs are turning their backs on investors offering too much seed capital to start-up businesses.
The Seed Enterprise Investment Scheme (SEIS) only offers a start-up access to equity cash of up to £150,000 over three years, and some entrepreneurs are urging new businesses to take less rather than more in the next round of funding.
SEIS is designed to help businesses get off to a flying start with financial support that might otherwise be unavailable from banks.
But the move from SEIS from seed to series A funding can be a headache rather than a boost to growth.
Xenios Thrasyvoulou is one entrepreneur who warns entrepreneurs to err on the side of caution when moving their businesses up a notch.
He started the online platform People Per Hour that matches freelances with businesses with a £500,000 investment within a year of opening for business.
“Five years later venture capitalists had come along and I had $10.5 million in cash and a much diminished shareholding in the company,” he said.
“Suddenly, my small team of six had mushroomed to 50 and I had to explain my decisions to a board of non-executive directors on handsome six-figure salaries. I had targets set to increase year-on-year revenue growth sixfold.”
Thrasyvoulou warns these expectations and pressures can just as easily kill a business as help with growth.
Discount voucher firm Groupon is cited as an example.
Groupon soon attracted multimillion dollar investments that bulked up the company’s market valuation. That boost turned out to be a millstone as growth faltered and the $20 foundered and has dropped to $13 as imitators strive to replicate Groupon’s initial success on a shoestring budget.
The lesson for entrepreneurs is maybe to think small, go with SEIS and consider very carefully who to partner with as a mentor or investor as they may bring experience to a business but also a host of unforeseen problems.
Thrasyvoulou says big investors brought chaos to People Per Hour.
“Start-ups do not need to grow quickly and often the business plan of the entrepreneur is at odds with that of the money men who want to see big profits,” he said.
“Fight to keep control and do not be scared to say no.”
People Per Hour changed direction after the investment cash arrived. Thrasyvoulou set more achievable targets, cleared out the board room and some of the new team and battled to keep a majority interest in his business.