A 5 minute read
Want to attract investment – a guide to preparing your business
For any business the key to any successful fundraising campaign, whether for a large project or capital development, is preparedness.
I have created this guide following conversations with business owners about options for investment and what they need to do to prepare their business.
Much of the work should happen in advance so that by the point that it becomes a ‘public’ campaign all of the groundwork is done. Being in a strong position to present your business to different investors requires an understanding of the sources of investment funds.
- Venture capital.
- Business angels.
- Other sources.
Whilst each of these fund providers has their idiosyncrasies they are all generally commercial in their approach and will be looking to ensure a keen return on investment.
Charlie Munger said “Understanding how to be a good investor makes you a better business manager and vice versa”.
You should take time to also consider not just the right type of investment but the right type of investor! Which investors are keen to support your type of business? Is help at hand for seeking advice about local initiatives? Do your homework in the same way that you would when considering a new business partner.
Ready: Getting the timing right for business investment
In seeking external support any business owner is accepting that it is difficult to find the step change needed for fast growth within their business by using existing assets. As such the decision to take in external finance is a very personal one. Below I have set out some issues worthy of consideration before pressing on to explore the financial markets:
- How confident are you in your Business Plan?
- Can fast growth be achieved without external finance?
- What is the value proposition delivered by greater access to finance?
- What are you prepared to give up to raise finance?
- Debt? or
- Would you consider giving up a stake in YOUR business?
The answers to the fundamental questions above are nothing more than a pre-qualification for investment readiness. Undoubtedly the appetite for investment will drive you to prepare properly for an investment hunt. It should always be borne in mind that this decision will increase the workload as businesses generally tend not to run themselves! It is also new territory for most. You should not underestimate the time it will take you, it will remove you from the comfort of day to day operations and into what can be an unmerciful, time consuming and rarely satisfying project … after all the work only really starts once you are successful in a round of capital raising; be honest: is it right for you?
If this is the right route, that said there can be no doubt that capital injection at the right time for any ambitious business can be the stimulus needed to move from good to great. The discipline involved in getting prepared for investment is also good at distilling exactly the why and what of investing in your business.
Assuming I have not put you off your plans I have set out below the expectation that most investors would have when considering supporting a business.
Steady: The market
Clearly any would-be investor will expect you to have a good grasp of your market. Have you completed research and can you share industry numbers with your suitors? It goes without saying that an ability to demonstrate any of the following will make you stand out as an investment proposition:
- A first-to-market advantage.
- Supporting intellectual property.
- Innovative products / services.
- Any USP.
These clear and obvious market differentiators, however, these need to be supported with clear evidence of the need for the products or services your business offers, and the size of the market to which this proposition is relevant.
Ultimately, an honest appraisal of the competition will also show depth and reason within your plans and will help the investor to appreciate the human element of any investment that is to be made. Many investors will make a decision based in part or in whole on the individual who is pitching the plan.
A thorough Business Plan is always useful although in my own experience it is the Executive Summary which I really pay most attention to. It is this abbreviated element of the wider plan that contains the golden nuggets. It should be sufficient to ensure that all of the major principles of any plan are simplified and made easy to understand. You do not want your business to appear complicated. For most investors complexity is a turn off unless you are pitching to investors with a particular interest in your sector who can and will understand the market-centric specifics.
The Business Plan should demonstrate your understanding of the market, it should objectively address your strengths and weaknesses and to underline your reliability, it should address weaknesses by indicating how you intend to deal with them.
Financial planning for a future with and without finance is clearly crucial to a decision to seek investment. The forward forecasts should always be supported by evidence where possible and should demonstrate a thorough understanding of the following:
- Past performance.
- Anticipated performance.
- How much investment is needed and when it is needed?
- How it will be utilised within the business?
To achieve the above you must have a focus on the investment required (debt or equity?) as either provides for a different profile when looking at expense to the business.
To pass the investment readiness test it will be imperative to be able to supply past years’ accounts, management information for the performance of the business in the current financial year, that business and personal financial affairs have been properly separated.
Very often investment is sought to build managerial capability and sustainability. These are very valid reasons as fast growth businesses can readily consume managerial capability.
Even if the investment is not needed for this purpose an investor will want to know about capabilities. They may take a different view to you as to your management capability so where possible be objective. If needed seek independent support to get a balanced picture of the managerial capabilities, complete a thorough review of skills and contributions towards the business, and be prepared to talk to your investors about key members of staff relevant to the longer term plans.
Your Business Case
Be clear to outline all stakeholders in this process. It will ensure that any offer of finance is inclusive of those that need to give authority. An investor will expect to have a clear understanding of the corporate structure of your business, an indication of the people needed to accept any offer of finance, and any specific corporate barriers to agreement.
The business case should set out the benefits for all. The forward forecasts will help but a clear return on investment proposition for any investor would also help them to grasp the size of the opportunity quickly.
Finally, your business case should demonstrate your complete understanding of this process and the likely result. Your readiness for the investment makes sure that the investment can begin to develop a return for all stakeholders immediately.
Go: The Process
- Build into day to day management the impact this process will have on those responsible.
- Do your homework and understand what investment is needed and from whom.
- Be honest throughout.
- Perfect your pitch.
- Get ready for any investor to complete due diligence.
If you found this article of interest, you may also like to read How to Successfully Sell Your Business