By Guy Rigby, Head of Entrepreneurs at Smith & Williamson
Family and friends are a great source of funding for start-ups and early stage businesses, but raising money from business angels or external investors is more challenging. Here are ten of the key issues that investors will be considering when they meet you or read your business plan.
1. First impressions
First impressions are critical. Most investors will decide whether to proceed within the first 30 seconds of any discussion, or within a minute or two of picking up your business plan. Think about your approach, test it on your friends and practise it to perfection. Don’t fall at the first fence.
2. Demonstrable need
Where is the pain and what exactly is the need for your particular product or service? Most businesses offer ‘me too’ opportunities which are not obviously exciting to an investor. Make sure it’s clear how and why yours is different. Is it better, faster, cheaper or is there some other reason why you will succeed when many others fail?
3. Existing revenues
Raising money for a business with pre-existing revenues is far easier, as demand for your product or service has already been partially proven. The fact that you have already established the beginnings of a customer base will carry huge weight in any discussions.
You may have a great idea, and you may have existing revenues, but what is the future for your business? Do you have a vision? If so, is it realistic or just ‘pie in the sky’? We’ve all seen those hockey stick-shaped graphs showing an embarrassment of riches only a year or two down the track. Don’t be tempted to over-promise and under-deliver. It’s normally transparent from the start.
5. Business plan
The credibility of your proposal will be reflected in the quality of your business plan. A poorly presented, badly researched plan will kill your proposal before it has a chance. An idea may be good enough to gain the backing of family and friends, but it won’t cut the mustard with serious investors. As the saying goes, if you fail to plan, you plan to fail!
6. Business model
Your business model will determine how and where you make your profits and how you will build long-term value in your business. A model that requires huge revenues to deliver small profits is inherently unattractive, whereas a business in a niche market with high barriers to entry will get potential investors excited.
Are you credible in the eyes of the investor? What is your track record and what experience do you have of your business? Most successful entrepreneurs ’stick to the knitting’, creating businesses based on their passion (something they know and understand), personal knowledge or experience. If this is limited, get the support of a mentor or partner. This will demonstrate maturity in the eyes of your investor.
Businesses go bust because they run out of cash, so be sure to demonstrate a good understanding of your financials. Margins and overheads will be part of the discussion, as well as working capital and cash flow. Remember that small businesses are normally cash constrained and prone to overtrading, so the investor will need to understand how you will manage this.
Don’t be tempted to overvalue your business. We are a long way from the heady dotcom days when investors were persuaded to part with large amounts of cash based on little more than an idea. Nothing will put an investor off more quickly than an excessive or unsupportable valuation. The more you need, the more you will have to give away, so be realistic, cut your cloth to fit and take in as little external funding as possible.
It’s very easy for investors to put money into your business, but how will they get it back? A vague idea that you would like to buy shares back at some future date is unlikely to be attractive. Taking in external funds means that you need to ‘begin at the end’ in terms of thinking about exit, having a clear strategy and plan. This may change as the business grows, but you need that stake in the ground.
These are just some of the issues an investor will be thinking about, often subconsciously, in the short time that he focuses on your business. If you’ve thought it all out beforehand and you can tick all the boxes, you’ll have more chance of success.
If your business is turning over more than £2m pa or has bank or other debt in excess of £500k, email Guy at firstname.lastname@example.org or call 020 7131 4914 to arrange a complimentary funding review — a one-on-one funding clinic to help you assess your needs.
Watch a video of Guy Rigby, Head of Entrepreneurs at Smith & Williamson, giving advice on how to manage cash flow.
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