By: Robert Steele
We have recently experienced significant issues relating to the timing and value of matched funding, in particular where matched funding is offered BEFORE equity or debt funding has been agreed.
So, why is the timing of matched funding an issue?
Put simply, if you are offered 50% or more of the raise by a matched funding outfit, either as equity or more often, debt, you psychologically believe that you are 50% or more funded. In turn, this raises your expectation as to the value of your proposed plan and proposition, and makes you believe that you are just one or two investors away from achieving your goals.
However, from my experience, if you have 50% or more of matched funding, you are still 100% away from securing the required equity funding to make the matched funding a reality! Why is this?
When a matched funding outfit offers you 50% or more of your raise, they do so on the understanding that you will secure the balance of the raise from an experienced entrepreneur within the space into which you will be operating. The problem with this is that you now need to find a very specific individual, or group of individuals indeed!
Angel investors, business angels and private investors come in many shapes and sizes, and whilst you should be focusing on those individuals that have some knowledge and experience in your sector, often they are not specifically aware of your business but may have related knowledge and experience.
The problem with this is that matched funding offered prior to securing angel investment often demands very specific relevance from the angel investor, and the angels you attract may not be suitable in the eyes of the matched funding partner. Effectively, you are placing the entire fund-raising process into the hands of the matched funding partner.
In addition, the very fact that you have received a matched funding offer, may make you believe that your plans are entirely suitable for equity investment, and nothing could be further from the truth.
The reason matched funding is offered with the proviso that you find suitable equity partners, is to ensure that the due diligence is done on somebody else’s watch and at their expense. The matched funding is offered in the knowledge that unless you secure an equity partner, who is prepared to do all the due diligence work, and perhaps get involved in a hands on way with the business, then it will not be honoured. As such, the matched funding is not worth the paper it is written on!
It’s like a mortgage company providing funds for a property ONLY on the basis that you carry out all remedial and construction works first. Once it has some value, they may then lend you the money, but until that point the property cannot be mortgaged.
Matched funding organisations are many and varied, and I would always recommend you consider them as part of the overall raise. This is also true for grants.
However, it is the timing of the matched funding that is important and which gives you control. Our suggestion would be to secure grants & equity BEFORE seeking an appropriate matched funding deal, as the matched funding organisations will always follow, but should never be allowed to lead!