By Guy Rigby, Head of Entrepreneurs of Smith & Williamson
Raising equity finance can be a lengthy and arduous process that will absorb the management team, so you’ll need to be focused and prepared. Whether you choose a business angel, an institutional investor or even a corporate investor, here are our ‘top ten’ tips to take on board.
1. First impressions
You only get one chance to make a first impression, so make it count. “We’re often disappointed at how poorly prepared many companies are when we meet them, with poor presentations and confusing messages”, says Jo Oliver of Octopus Ventures. Many investors will decide not to proceed within the first 30 seconds of any discussion, or within a minute or two of picking up your business plan. Understand who you’re talking to and review your target investor’s criteria carefully to ensure a good fit.
2. Vision and strategy
Investors have to be able to buy-in to your overall vision, so you need to communicate that vision in an articulate and appealing way. You need to demonstrate your competitive advantage in your chosen area and explain why your particular approach will succeed. Karima Serageldin of Ariadne Capital underlines the need for companies to research the competition: “Are you solving a real problem? What is your unique advantage?”
3. Business plan
A well thought-out and comprehensive business plan is essential to any investment proposition. Include detailed and plausible information on where you see the business in three to five years, along with critical success factors. Gary Robins of Hotbed, the private investor syndicator, says, “Make life as easy as possible for your prospective investors. Think through every conceivable area of interest that an investor might have when looking at your business, and have all the answers covered when you go into bat”. Your business plan “should show ambition, but growth levels must be achievable, with allowance made for sufficient resource to invest in the business”, cautions Shani Zindel at Isis Equity Partners.
4. Management team
Your pitch should clearly demonstrate the capabilities and competencies of your team, giving assurance to your investor that they have the skills and experience to manage the business and maximise its potential.
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. Integrity is the name of the game and no business is ever entirely problem-free. So don’t bury bad news or focus only on the positives – just tell it like it is. “Keep your presentation simple, be yourself, and listen”, says Harry Briggs of Balderton Capital.
“Establish a network of trusted advisers and entrepreneurs who can share blueprints, offer advice, open up their networks, and constructively challenge your assumptions”, suggests Karima Serageldin at Ariadne. 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.
7. Financial results and forecasts
Take the time to understand your numbers and the drivers affecting your cash flow and profitability. Get familiar with commonly used financial language and its meaning. “If a business has a realistic and pragmatic view of its order book and its strategy is effectively aligned with its customers’ needs, it’s more likely to appeal to a private equity backer.” says Dan Adler of Lyceum Capital.
Be aware of key threats and sensitivities. Gary Robins at Hotbed says, “don’t overlook even marginal competitors, and… always ensure you have considered the threats posed by companies that will lose out if you are successful”.
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 is funding and will be able to weigh up the likely consequences of his investment.
9. Valuation and Pricing
“Maintain a simple capital and IP (Intellectual Property) ownership structure. Stay lean but ensure you capitalise the business sufficiently to get to your next milestone. Be realistic with valuations”, advises Karima Serageldin. Whether this is based on hope value, assets or earnings, don’t be tempted to overvalue your ideas or achievements.
It’s very easy for an investor to put money into your business, but how will he get it back? A vague idea that you would like to buy his shares back at some future date is unlikely to be attractive. 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. Karima Serageldin sums it up: “start with the end in mind – big picture vision and exit path”.
A date for your diary
Later this year we will be hosting an event focusing on how to grow your business using external equity funding. “Inside Venture Capital” will be held in London in October.
If you are interested in attending please email your personal and business details to firstname.lastname@example.org.
If you would like to discuss the subject covered in this article or you want to sound out someone about raising finance for your business call Guy Rigby on 020 7131 8213 or email him at email@example.com.