In Startup Management


Recently esteemed entrepreneur, writer and investor Paul Graham posted an essay entitled How to Raise Money, which has since appeared on just about every mailing I get about entrepreneurship as a recommended read.  It is an absolutely excellent essay which I really enjoyed, and one I will come back to from time to time.  It struck me that some of his comments are less applicable in Scotland than elsewhere however…

One of the Paul Graham’s key points, which sounds like excellent advice in principle, is “Close committed money.  It’s not a deal till the money’s in the bank.”.  Here he suggests that if an investor is committed you take the money and sign the legals, even if you’re still looking for more money to complete the round.

Some investors will undoubtedly be happy to do this, although I suspect that some will not want to commit their cash until they are confident that the full amount will be raised.  After all, the full amount of a raise should take the company to a value inflection point, while only part of the money probably won’t.

In Scotland there is an added complication.  Often fundraising at an early stage makes use of investment from the Scottish Investment Bank (SIB) through the Scottish Seed Fund or the Scottish Co-Investment Fund.  Since investors in Scotland have become used to working with SIB money, it seems to be conventional to close legals and transfer cash in one big go once the round is complete.  Doing legals separately with different investors in impractical where SIB is involved, as they generally expect everyone to be investing on exactly the same terms.

So what can Scottish companies do?

  • Follow Paul Graham’s advice and get a commitment to the investment in writing.
  • It may be possible to have the investor transfer cash to either their lawyer or the company lawyer for release to the company only on completion of legals.  The psychological move of transferring the cash demonstrates a very high level of commitment even if it is still possible for the deal to fail at the legals stage.
  • Where there are investors who are prepared to do so, they can transfer cash into the company in advance of legals, although this is not common and holds risks for both parties.  SIB will still match the funds as long as they are untouched at the point the deal closes with SIB

Any of these options requires the appropriate professional advice (for both investors and companies), and it will be interesting to see if more entrepreneurs start looking for strong signs of commitment from investors in Scotland early in the process.  I certainly know of deals in the past where terms have been agreed, hands shaken, and the for no obvious reason (e.g. nothing came up in diligence to raise a red flag) the deal has not gone ahead, so there could be a motivation for entrepreneurs to do so!



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