The path of a growing business is never a straightforward one. The journey can be riddled with uncertainties, and the only thing you can do about it is to plan.
Most companies following a growth strategy will need to seek external investment at some point. For many, equity is the favoured solution. However, attracting the right investor for your requirements is not quickly done.
Investors are in it for a simple game: risk and return. They need to understand the minimum odds of getting a reasonable return before putting their hand in their pocket. How much they are prepared to invest will depend upon the element of risk that they feel is involved and whether they see your idea as worth their time and money.
For this reason, you need to be ready before setting out to secure finance. You need to have specific measures in place to attract investors, including a bulletproof business plan, compelling pitch and understanding of the offer you want.
Before you get into the planning, here are three golden rules to get you started:
- Don’t raise investment on the back of someone else’s success – every story is unique, so carefully consider if this is the best route for you too.
- Don’t approach fundraising half-heartedly – raising finance is a full-time project and deserves your complete attention.
- Don’t tackle a funding bid alone – investors like to see the bigger picture and understand everyone that’s involved in the business: it’s a team effort!
Keeping these golden rules in mind at all times, these are our five steps to getting your business investor-ready.
- Identify whether equity funding is right for you
- Demonstrate a robust financial model
- Be realistic about your valuation
- Detail the investment opportunity
- Research potential investors
Identify whether equity funding is right for you
In the funding world, most types of finances can be divided into one of two categories: debt or equity. Investment, whether it be from an angel, venture capitalist or private equity, is commonly associated with equity.
When utilising equity funding, there are specific characteristics you will need to accommodate. The main one is giving away a portion of your company via shares, which will be held by any investors you bring in. The expectation is that, over time, these shares will mature and culminate in profit for the investor.
While some shareholders may happily become a silent partner, others may want an active role in your company and to have their say on your business decisions. So, by seeking investment, you need to accept this possibility and be prepared to have an additional voice to consider while running your enterprise.
The benefit of equity over debt is that you do not need to make repayments. You can also keep investors on board for as long as both sides want, though it may be worth putting an exit plan in place to set out a timeframe and work out how any shareholders will step away from your business.
It’s also worth noting that, generally speaking, investors are looking for companies that have high growth potential. You will need to be able to convince them that this applies to you. If you are not looking to grow or are instead focusing on recovery, it may be a sign that equity is not a fit for you at this time and consider debt funding instead.
Demonstrate a robust financial model
Keeping your finances in order should be a given, but when you are facing the once-over by investors, it’s imperative. Leave no stone unturned in preparing your financial documentation and make sure you have everything to hand.
Depending on what stage your business is at, your financial documentation will carry different levels of sophistication. At the very least, a sound business plan should show comprehensive projections for the next 3-5 years. This involves taking a closer look at the numbers and scrutinising the figures. You need to be crystal clear about your trading history, your gross and net margins and the current state of your balance sheet.
Your financials will all be part of the due diligence carried out by investors to test the risk factor of their opportunity, and you need to be able to answer their questions with confidence.
Once your figures are detailed in a spreadsheet, you should take the time to test the figures by running several likely scenarios. This will not only satisfy your need to know our projected figures stack up but will also demonstrate to an investor that you are prepared for many different outcomes.
You will also need to produce a corresponding cash flow forecast, and it is useful to understand the different levels of return for varying levels of investment.
A record of your financial results to date, set against your projections as a result of the investor capital, will also go a long way to proving the viability of the proposed investment.
Be realistic about your valuation
The current value of your business is crucial to investors when calculating the scope for a return, and the likely levels this will hit.
Don’t try and fool anyone when placing a value on your company. A false (or exaggerated) valuation is worthless and will be spotted by investors as unrealistic, or even too good to be true. You will need to research this by comparing the most recent valuations for other businesses in your area but be careful not to be swayed by them too much.
The advice is to head middle of the road and go for a safer bet: it’s more promising to over than under-achieve. Some investors look for an income stream, and others seek capital growth, but either way, the value of the business is important in its ability to generate a future return.
Knowing the value of your business will also help you to confidently enter pitches with investors, understanding precisely what you are worth and the kind of offer you are willing to accept.
Detail the investment opportunity
You are just one in a long line of businesses seeking investment, and you have to believe that your opportunity outshines the competition. Investors initially work on pitch decks, and if they’re interested, they’ll seek further information. During this process, you may also wish to outline the number of shares you are willing to give or any other terms, though these could be open to negotiation.
You’re ideally looking to achieve a slick-looking presentation to cover:
- Introduction
- The team
- The problem you are solving
- Advantages
- Your solution
- Your product or service
- Your traction to date
- The market
- The competition
- Your business model
- Investment required and the potential return
- Contact details
The key is to provide factual information that is clear and concise. We’ve created a guide to crafting your pitch that will assist the process.
If further information is requested, you’ll need to present your business plan document with fully detailed 3 to 5-year financial projections outlining the bigger picture.
This will need to address the following questions in more detail:
- What does your business do?
- Who are the management team?
- What is the potential market size?
- How ample is the market opportunity?
- What level of funding is required?
- How will the money be spent?
- What is the long-term business potential?
You should have a comprehensive business plan in place from the outset so that it is ready at an investor’s request, just keep it up your sleeve until that moment.
Research potential investors
It is crucial to identify the scale of funding you require so that you can approach the right investors to best match your needs. If the finance value is relatively low, you shouldn’t discount your family and friends as potential investors, or there are crowdfunding and business angels options available.
For more significant sums of money, including those running into the millions, there are larger-scale investment options including private equity, venture capital and enterprise investment schemes.
Whichever route you pursue, be sure to target your potential investors carefully. Doing thorough background research will save you a lot of time in the long run and prevent you from selecting those who would never invest in your industry, size of business, target market or project type anyway.
So, when conducting your investor research, you not only need to look at these factors but also the finer details around the interest rate, the level of fees to be charged, the term of the loan, speed of finance and sector knowledge.
Developing a thorough understanding of your target investors doesn’t guarantee you’ll secure the investment, but the time and effort to do the right preparation should undoubtedly increase your chances of success.
Get advice
Knowing the road ahead when seeking investment is fundamental to ensuring you secure the funding you require. And, with the right financing, you will be well on track to achieving your ambitions and scaling up your operations.
If you are new to business funding, we understand it can be a challenge to understand the preparations and evidence you need to have in place to attract people towards your business, as well as where to go to find suitable investors.
If you need some advice, our advisors are available to help. We will work with you to understand the best routes to finance dependent on your needs, as well as how to create winning business plans and pitches to help you get there.
We also have a vast network of investors and other funding contacts to point you in the right direction.