(serving the needs of your most important stakeholders – your potential investors and their expectations)
So, you have a business idea or a running venture that you know has the potential to grow if you had the money to spend on expanding it. You know and understand the dynamics of the different ways to fund your business from the article – Demystifying Funding – A Thought-out Business Funding Strategy.
Given the traditional, formal lending avenues are fairly conservative in their approach to business funding, here we look at Seeking private investment. It may come in the form of a loan, or as equity finance, which will see you handing over a share in the ownership of your company in exchange for capital investment.
So, what are some of the things you need to be on top of before you embark on this journey?
All the numbers, for starters. Be ready to share your current and projected revenue and profit figures; and any other documents which attest to your business bona fides – think tax returns, latest accounts, and copies of any leases and contracts.
Investors will also want to know about your goals for the business, how you intend to achieve them, what you’re planning to spend their hard earned cash on and when they can expect to see a return.
If you are seeking funding for expansion or growth you’ll need to have a feasible projection of expected revenues and profits; and above all a good idea of how much it will cost to get there.
“Think about what you would want to know if you were the investor and if the answer makes sense. If your profit seems high or low, make sure you can justify it.”
It’s not enough to just know your own business, you need to demonstrate deep knowledge of your industry and what your competitors are up to.
“The best time to raise funding is not when you’re strapped for it.”
Prospects are unlikely to back you if it is obvious you are likely to use the funds to augment your working capital, rather than for legitimate expansion or commercialisation activities. As a basic fundamental of business, you need to show a decent profit and enough cash flow to cover all obligations coming due.
More importantly, attempt to fix any “Leakages” in the business and streamline your processes to ease cashflow beforehand. Have a good third eye in the form of a Business Advisor or a Management Consultant run through the business FIRST.
All this boils down to investor readiness. The due diligence process, usually screens and analyses under a selection criterion using a combination of business plan fundamentals and essential characteristics. The following should serve as an implementation guide or a checklist covering prospective investor expectations before approaching any potential backers:
- Founding Team The management team should consist of experienced, stable and well-credentialed individuals. They must be knowledgeable in their industry as well as being capable of successfully implementing the business plan and managing the company’s operations, execute and achieve the critical milestones. Investors invest in management who are passionate, accomplished, well referenced, work well together and are committed to the success of the business.
- Market The opportunity to build a company really starts with the attractiveness of the market opportunity. The size, demographics, trends and growth rate are the most important metrics but there are other factors that are also important. The industry structure, barriers to entry, customer switching costs, competitive landscape, behaviour of incumbents, etc. all play into the attractiveness of the market.
- Product/Service The product or service offered should solve a problem or meet a need with a clear value proposition and point of difference; USP if you will. The offering should not require significant behavioural change on the part of the customer but represent an improvement over the current gold standard_ in practice. This suggests the least resistance toward market uptake.
- Business Model The business model is the means by which you can develop a profitable business in a repeatable manner – that is intuitive and compelling with appropriate pricing and promotional strategies. Most investors don’t have an appetite for businesses that require large amounts of capital. They usually prefer businesses and business models that are not capital intensive with high and sustainable gross margins. The combination of these two factors with a high growth market supports internally stable and sustainable growth rate.
- Competition The management team should appreciate the competitive landscape and understand both its present and future direct and indirect competitors. They should also have a grasp on the sustainable competitive advantage that it can build through various means. This is critical and could be a good potential exit or expansion source.
- Exit Strategy Successful investor exits will be the result of M&A or an IPO, but overemphasis on exits via an M&A or an IPO unless there is good supporting data can be detrimental. Instead, show a management team that has a company building mindset which will achieve and attract M&A opportunities as opposed to a single “build-it” to flip track. Regardless, have a clear exit strategy for the investor.
Approaching investors unprepared is probably the single most common reason why entrepreneurs fail to attract capital. If your proposal does not include most or all of the above, you lose credibility very quickly.
However, once you learn how to make your business “investor ready” and you succeed in attracting an investor the first time, going for subsequent rounds of funding, or funding a new venture becomes much easier. Hence if you want to become a successful entrepreneur, it’s worth spending the time and effort to learn how to make your company “investor ready”.
Whilst, meeting the criteria and your assessment of whether your company is a good candidate given the criteria should usually be fairly straight forward, the key is to lay out the information in a format which is accessible and appropriate at the different stages of the fundraising process.
For completeness, we will look more on the preparation and content of Investor Materials in a separate article.
The criteria and content in the presentation material really haven’t evolved or changed at all. The presentation techniques and tools have certainly evolved and much easier now than ever.
Why then do businesses find it difficult to raising capital?
The answer, from our experience as investors, lies in the few key points no one seems to address.
“The Elephant in the room” conversation pieces which occur after a pitch.
These are usually hidden under a veil of “diplomacy” or “modesty”; they are:
- A Realistic and feasible business plan containing a sound business strategy for growth
- Achievable financial forecasts with potential for returns on investment (ROI)
- Management Wages– investors are not there to support your lifestyle. Grow the business and earn the right to the lifestyle
- Efficient and Transparent internal accounting, financial systems and reporting
- Detailed Use of Funds Statement, describing how the investment capital will be used
- A Realistic Valuation of the business, the equity available for the investor and an exit strategy
- Investors Role– A willingness to include, the Investor in the management of the business or to join the Board of Directors
After all, it’s all about money, investors want to be comfortable, money matters are being and will be handled with respect. Most investors are in a position to invest because they have earned their way there – so respect that and be willing to value and involve them. Last, but, certainly not least, most investors can sense “pie in the sky” – respect their time.
Less fluff, arrogance and ego usually score quite highly.
Address these areas early and honestly to avoid wasting time and start working with your backers to bring your vision to life.
Highlighting these general dynamics and the most common funding challenges should steer the funding quest in the direction of least resistance to secure appropriate capital for the business.
Let us know how you manage to secure funds for your business.
If you need an external eye to look at your quest for funding, Pick up the phone and call us for an obligation free assessment.
The question therefore is, how do you effectively plan whilst there is constant conflicting “Cashflow Juggling” and “Firefighting Activities” to attend to?
The answer: Like riding a bike, it is frustrating and hard as you start the process. But, it becomes easier as you get in the flow and see the possibilities.
I am always keen to understand the challenges businesses are facing in adopting measures to increase value – so, please do connect.
Ketan Shah is a Strategic Business Design expert, advisor, management consultant and entrepreneur. Especially passionate about Business Strategy, Structures and Systems, he has designed and developed the SSS Business Design® framework for startup entrepreneurs and established business owners looking to make business decisions with clarity, confidence & control. Pursue opportunities, manage profitable growth and maintain high performance. Without the overwhelm, stress and frustration.
Moksh Pty Ltd is a Strategic Business Design, Advisory, Management Consulting, Capital Solutions, Investment & Funding Partner supporting Start Up, Commercialisation, Transformation, Turn Around, Growth and Initiatives.