Raising finance is a complex and time consuming process that keeps company owners and Financial Directors (FDs) awake at night. Yet, the level of stress can be reduced if you apply these common sense rules while engaging with investors.
Return on investment
The prime consideration of all investors is a return on their investment, hence they are looking for a company with good growth prospects. They need to understand what the key drivers are that will make the business profitable and how they will eventually get their money back out of their investment. You need to provide them this information.
Some of them also want to claim tax benefits from their investment. The government provides a variety of tax incentive schemes, such as Enterprise Investment Schemes, to encourage people to invest.
Another important consideration for investors is risk which should be minimized through the due diligence process. You will need to put together a credible Information Memorandum which is an equivalent of a survey report in the process of house buying.
Sourcing and qualifying the investors
Profiles and contact details of potential investors can be sourced from LinkedIn, Companies House and online lead generation tools like DueDil.
In course of the qualifying process you will be able to determine who the serious investors are – by asking questions about their investment history, professional background, checking whether they are so called ‘high-net-worth individuals’. It’s also essential to get an understanding of their exit strategy and future plans. Are they interested in future investments? How active a role they wish to play in the business?
Once you gather a group of serious investors, you start the ball rolling by arranging meetings and telephone calls to answer their questions and to address the issues about which they may have doubts.
Finding a cornerstone investor
A cornerstone investor is someone who believes in the company or the product and they are committed to supporting it. They will bring to the table more than money: their knowledge of the sector, unique insights into the product or technology and their contacts.
If you’re buying a house, your cornerstone investor is the bank because it has vested interest in the success of your investment.
This is why you should be identifying those people at the beginning of the process and getting them on board. Those ‘sponsors’ could also help you to source other investors.
Benchmarking the business
In every sector there is competition and prospective investors want to know how the business fits into that market.
Returning to our example of house buying, a potential purchaser will look at houses in the neighbourhood and estimate how his potential purchase measures against similar properties.
For example, investors would like to know how gross margin of the business compares with that of similar businesses in the sector. If the company’s gross margin is 50% but its competitors’ gross margin is £30%, you would need to explain why the company manages to achieve so much better profitability.
Benchmark analysis is done during the process of assembling information about the business which is presented to investors. It could be included in the Information Memorandum or during a meeting with investors.
Asking for feedback
It’s key to asses how the offer and pitch are perceived by potential investors.
No’s are as important as yeses at this stage. From the no’s you’ll learn what investors are thinking. Is the valuation correct? Are they having doubts about the management team and their skills?
Knowing when to stop pursuing some investors
A warning sign that some investors aren’t committed is when they stop returning your calls. Their interest is clearly waning, so don’t waste your time on them.
Also be vigilant about extra questions coming after a week delay. When potential investors have many questions, this is usually a good sign. However, you should be wary of time wasters - investors who after initial discussions remain silent for a while and then start sending you single enquiries, biding their time. Disqualify them from the race at once.
Negotiate a win-win situation
Approach the negotiating table with a desire to create a win-win situation.
Investors should be leaving the discussions thinking that the deal is advantageous for them – even if the sum is high. Equally, the company’s management team want to be sure that they are not giving their equity too cheaply. Both parties have to be happy with the valuation.
This is a fundamental requirement of the process. Keep your potential investors involved and communicate with them regularly – until a completion and receipt of funds. If there are market developments or regulatory changes that affect the price of the company or its ability to deliver forecasted sales and you let the investors know about them, they will show their understanding of the situation. If you keep them in the dark, their trust will be eroded.
Finally - Celebrate!
Close the deal with a bit of celebration, involving everyone. A dinner or a small party is a good feel gesture that will leave warm memories in everyone’s mind. It will also help them remember the part you played in the successful deal.
By Rashesh Joshi, Numitas FD