This is the first part of a series discussing raising money for your subscription business. Part one walks you through how to pitch and raise angel money with insights from Limio's co-founder, Amaury. The second instalment of the series will explore the topic from the investor's point of view.
As the first month of the new decade draws to a close, there have already been many exciting developments in the way of subscriptions. Canoo opened its waitlist for an EV subscription service. Apple TV, Disney+ and Netflix are engaged in the heated ‘streaming wars’. Major sports teams from across the World have begun offering exclusive content for paying members. Before you can begin making the headlines with your subscription businesses, you need an idea, and ideas need money. For a startup, there are plenty of methods to obtain capital, but there not all necessarily suitable based on your lifecycle.
One avenue for fundraising is angel investors. Angels are high-net-worth individuals that can offer early startup funding. As well providing capital, angels can be valuable in many different capacities.
Amaury, CEO and co-founder of Limio, offered us his knowledge into the landscape of raising money from angels.
As a potential founder, what particular complexities should I know about before starting a subscription business?
Starting a subscription business can be extremely complex. The recurring element, which is the major difference from a normal sales model, can make life difficult. Ecommerce is about one-off sales, but with subscriptions there’s a lot of terminology to understand. What makes it more challenging, is that the terminology itself is inconsistent across businesses and you have to do your best standardising it to avoid confusion. One example of this terminology is ‘sticky customers’. The stickiness refers to the customer’s likelihood they’ll continue using your product or service after the first purchase. This is both good and bad. Your first customers are going to be hard to acquire from competitors but it also means that once you have acquired them they are unlikely to switch.
Subscriptions have complex logic, so expecting this logic to be handled by your developers rather than business people is not a good idea. Developers are expensive, are not subscription specialists, and they should be building your product. At the same time, there are clear interaction points between a subscription management system and an application or a product. Can this customer receive access now? When will they receive their product? What if the payment fails? If you don’t make the whole end-to-end experience smooth for the customer, you will have lower conversion and retention rates.
Let’s say I've begun my subscription startup journey and I need capital. What does the current environment look like?
Over the last few years, it’s become fashionable to sell subscriptions. Riding off the success of companies like Spotify, Netflix and Amazon Prime, so it’s an attractive proposition to investors. In the UK, there’s also the additional benefit of the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) that offers significant tax relief to angels investing in small companies. So in a way, it’s a great time to raise for a subscription business, but it’s still incredibly challenging and just like any business, you will have to demonstrate a strong team and idea.
Where can I go about finding angels?
It’s not a matter of finding angels, instead it’s about introductions. When we first looked to raise for Limio, we pitched to a Venture Capital (VC) firm. They explained that because of our infancy, we weren’t suitable. However, from the VC team was one individual who wanted to invest as an angel. This first angel provided introductions to ten further leads, and from those ten we were introduced to several others. Angels are not institutions, they're people that you have to meet and get to know. Hence, why networking is at the heart of finding the right investors for your company.
Is there anything I need to include in my pitch to angels?
I’m afraid I can’t give you the secret list of best metrics to use in a pitch, because it doesn't exist. You have to realise that seeking angel’s money implies you’re at an early stage in your startup’s life. The great thing is angels understand this too and aren’t expecting you to have huge multiples and metrics, but whatever information you do have that shows your idea has potential is always a positive. Angels, regardless of their net-worth, are people. As individuals they want to know that the people they’re investing in are a good team, enthusiastic about the idea and its potential. I couldn’t stress the team element more.
That said, angels come from a variety of backgrounds and cultures so should be taken on a case by case basis. There are those who intellectualise the approach and focus much more on the due diligence process because that’s what they did as investment manager or venture capitalist. These individuals will want to see the potential of the product, the size of the market, and any related information you have available.
Anything in particular that I could be doing now to present an investor?
I’d say traction. As a company, getting that first customer to join or buy your product is difficult and the same goes for the second and third customers. Going from three to ten becomes a lot easier because by then it’s clear you have a replicable product. It also shows the investor that you’re willing to put in the work to achieve results.
Okay, so they’ve completed their due diligence, is there anything I should be asking the investor?
Absolutely. Quite literally, ask if they are in a position to invest. Sometimes angels might attend the meeting, to then let you know at the end that they don’t have the money, or that they will in the future. Angels are high-net worth individuals and can have complicated financial lives with money tied up in something else - remember the money is their actual money, not someone else's. If an angel is waiting on a liquidity event, it can be a frustrating issue that just adds delays to the whole process. Although, this issue is more likely to happen with friends and family.
You’ll also want to know if they've ever invested in similar areas. This is usually a good indicator of their knowledge on the subject and market. If they have invested in similar companies, then this is a chance to carry out your own due diligence on the investor. Ask the company what their relationship and experience with the investor was like, how helpful they were/are etc.
Finally, you’re there to ask for money, so be direct and ask. Don’t tiptoe around it.
Could you walk me through the process of securing a first round?
When you’re still in the early stages, VCs are not the only way. Everyone knows about VCs because they have a marketing budget and put out a lot of content - unlike angels who are one-man/woman-band and don’t have time for marketing. VC’s interests are towards mature startups or startups going after huge markets, so you’ll find angels might be a better route.
In terms of a timeline, if you’re efficient then anywhere around three to six months from the first email to the money being in the bank. The benefit with angels is that they're usually responsive and can make a decision quickly. You’d usually have a good indication whether they want to invest or not by the first or second meeting. If they don’t, that can be a red flag. The difficulties also come from actually getting the money transfered. Be ready to chase many people. It's not a stretch to call the whole process a part-time job.
Are there any areas in the future that’ll receive more attention from investors?
The reality is that over the next ten years there won’t be an area that’s untouched by subscriptions. That’s because every industry will be ruled by software, and software businesses are completely switching over to the subscription model. However, for this gradual change to occur, there needs to be more flexibility in the model. Whether it’s usage-based, time-based, fulfillment-based, you need to be able to deal with recurring transactions flexibly.
We should also see more experimentation among subscription companies trying to monetise subscriptions through new channels or devices. Monetising through these channels (Facebook, Google, Instagram) or devices (mobile, VR experiences, connected devices) is a new challenge as you might not fully control the subscription experience, for example in the Apple App Store or through a Google-operated paywall.
For Limio, we're still hard at work towards our goal of creating a no-code subscription platform that can handle all the myriad of ways subscription companies want to monetise. It’s currently complex for anyone to start a subscription company, even with developers. We want to eliminate this complexity and allow anyone to create their subscription businesses with no-code involved.
Limio is the subscription commerce platform for people serious about growing subscription revenues. Whether selling subscription boxes, launching a digital SaaS service or building a subscription marketplace, Limio has the advanced site-building capabilities, commerce and payments functionality, and subscription analytics that you'll need. There is no better way to create and grow your subscription business. Get in touch today with a free 14-days trial to get started.
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