24/10/2011

By Mike Giles, Marketing Director at the FD Centre

Entrepreneurs are naturally cautious about giving away equity in return for funding for two main reasons:

1. They don’t like the idea of sharing control of the business; and

2. They don’t like the idea of having less for themselves


Although it is fair to say that there is usually a requirement to relinquish some level of control when investment is acquired it doesn’t follow that there is ‘less for the entrepreneur’ as a result of doing so. In fact, it may not be necessary to experience a dilution of shares at all. It really comes back to understanding your options and determining the most appropriate route to take.

The purpose of securing funding is to enable a business to grow and to enable shareholder value to increase. The real issue business owners’ face is in understanding the complexity of their options and navigating through the process.

Entrepreneurs often set out on completely the wrong track due to a lack of awareness of the possibilities. They need to consider whether it is more appropriate for them to seek angel funding, venture capital, debt financing or some other form of investment.

Often business owners simply want the money and are less interested in the detail of how to get hold of it! Even when business owners have convinced themselves that funding may be the best option for the business; they are often held back by a host of other concerns.

A major roadblock for the business owner can be a lack of financial literacy and understanding of the language of investment. Business owners may defer their decision to seek funding and talking to possible investment sources because they don’t have a prior understanding of how to value their business, they don’t know how much money they need and they don’t have a proper business plan to support their case.

Finding the right partner and knowing how they are positioned in the new relationship can be a thorny issue too, especially when they might be reluctant to relinquish control on the one hand and when the prospective partner might be seeking a more prominent role in the day to day running of the business on the other.

Another barrier is the perceived (and often actual) complexity of the process. CEOs and MDs really can’t afford the time to learn the ins and outs of funding and then begin the hard work of preparing documentation to attract the right kind of investors.

It is also important for the business owner to be in a position to negotiate the best funding deal for their business and to consider not just their immediate requirements but possible requirements further down the line. It may be that they will need additional rounds of funding and therefore a full understanding of their longer term objectives before they start sourcing investment will add real strength to their proposal.


The Solution

When business owners arrive at a decision to investigate funding options it usually follows that they are not wishing to drag their feet!

Business owners need to cast the net wide to maximise their opportunity of finding investment. Here are some of the key procedures businesses need to follow in order to find funding:

- Understand ambitions and objectives and requirement for funds

- Act as devil’s advocate and ask questions which will help steer you in the right direction

- Understand the business model in detail and determine options for an exit

- Determine the right kind of funding partner(s) for the business (VC, banks, high net worth individuals etc) and the business owner’s ideal partner profile (active, passive etc)

- Review the history and track record of the business

- Explore the business model’s proclivity to risk

- Understand the timescales and urgency of the proposed funding

- Prepare documentation and data for due diligence

- Write a business plan in preparation for funding and include indicative valuation if equity funding

- Identify and appoint any necessary third party specialist advisers

- Identify list of funders to approach

- Negotiate with a shortlist of funders

- Determine ‘best fit’ funders based on suitability for the business across a range of criteria

- Project manage the transaction from beginning to end

- Manage the due diligence phase

- Work with lawyers to finalise contract

- Work with the funder on investor relations

- Develop and deliver a strategy against pre-agreed milestones


Benefits To The CEO, MD And Senior Team

Funding is often the catalyst for taking a business to the next level. Deciding to go down this route and having to learn how a whole industry functions can be a painful process. Business owners need assistance from someone who has experience of the process and understands the pitfalls and advantages to help lift the cloud of uncertainty.

It is often just a case of shifting mindset and accepting that bringing in funders is a necessary part of the business growth cycle (not always, but much of the time). When the right partner is found it can make a profound difference to a business. It may be that the investor brings much more to the party than just money and can add great value to a business in terms of experience, expertise, infrastructure, channels to market as just a few possibilities.


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