By Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson
Chapter from The Entrepreneur’s Handbook:
The Great British Entrepreneur Awards 2013
Keeping ownership in the family is generally the preferred choice for most businesses. However, some find that cash constraints or growth opportunities make it either necessary or desirable to raise additional finance. If this cannot be found through borrowing or other non-equity sources, then raising external equity may be the only option.
If you want to attract external equity, whether from a business angel, an institutional investor or even a corporate investor, a number of boxes will need to be ticked. Here are ten of the key drivers:
1. First impressions
• Understand who you are talking to by doing your detailed research in advance.
• Dress sensibly, be on time, know your market and understand your shortcomings.
• Explain clearly and concisely what you do and what you are trying to achieve.
• Be enthusiastic, but realistic. Don’t make outrageous claims or forecasts.
2. Vision and strategy
• You will need to demonstrate your competitive advantage in your chosen area and explain why your particular approach will succeed.
• “VCs are not gamblers, they're astute business people,” says Seb Bishop, founder of Espotting. “They like to invest in a proven model”.
• Taking that ‘elevator pitch’ methodology to the extreme, investor Simon Dolan requested pitches through Twitter saying that the discipline of pitching within the 140 character limit helps to “focus the mind.”
3. Business plan
• A well thought out and comprehensive business plan is an essential part of any investment proposition.
• Make sure yours includes detailed and plausible information on where you see the business in three to five years.
4. Management team
• Your pitch should clearly demonstrate the capabilities and competencies of your team.
• Be aware that the skills and experience required to run a smaller business may differ from those required by a larger business.
• If any skills are missing it may be worth bringing someone in or identifying a prospective candidate with a suitable skill set prior to seeking investment.
Investor James Caan’s advice echoes the importance placed on the management team when evaluating investment opportunities. “Management quality is the single most important intangible that outweighs all others when assessing the future potential of any business.”
5. Trust and transparency
• Investors don’t like surprises - they demand honesty and transparency.
• The quickest way to lose a potential investor is to sacrifice trust by embellishing the truth. So don’t bury bad news or focus only on the positives - just tell it like it is. If there are problems in particular areas, highlight them and explain how you will address them.
• Raising external equity can involve a bevy of advisers, including accountants and lawyers on both sides and, often, a number of other experts.
• It’s important that you select experienced advisers who are both appropriate to the size of the transaction and who have seen it and done it before.
• Don’t be one of the many who only discover what they have signed up to after it’s too late.
7. Financial results and forecasts
• Be particularly prepared for questions around your working capital, the engine of your on-going solvency, and consider the effectiveness of your KPIs and regular management information.
• Don’t just leave an understanding of this crucial area to your finance director or your financial advisers. Take time out with your finance director or your financial advisers so that you fully understand your numbers and the drivers affecting your cash flow and profitability.
8. Funding requirement and purpose
• Your business plan should include a separate section setting out the amount you are seeking and the purpose for which it is sought. In this way, your investor will be able to identify precisely what it is that he or she is funding and will be able to weigh up the likely consequences of the investment.
• Think long-term, as the investor would rather provide additional funding at the outset than find a shortfall emerging later on.
9. Valuation and pricing
• There are a number of ways of valuing a business. In a start-up, values are often extremely difficult to assess, whereas this can be easier in more mature businesses.
• Work with your advisers to establish a sensible valuation for your business.
• Remember that external equity can be expensive. The more you need, the more you may have to give away.
• Taking in external equity means that you often need to ‘begin at the end’ in terms of thinking about exit, having a clear strategy and plan.
• Who are the likely buyers of your business? What will the business need to look like in order to be attractive to them? Will the sale be to a trade buyer / competitor or might the business be attractive to a financial investor, such as a private equity firm?
• Plans may change as the business grows, but be aware of the possibilities and put your initial stake in the ground.
To discuss attracting equity finance for your business in more detail, contact Guy Rigby on 020 7131 8213, or email email@example.com.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.