Before any business tries to attract new capital from outside the “family”, there several questions that need to be answered:
- Do you really need new capital? Raising capital can be a long and stressful experience, so first look for other sources of funds. Perhaps there are asset or cash flow lenders who will help. There is a wide range of specialist funders out there – not just the High Street banks.
- When do you need the money? It can take several months, so it is never too early to start planning.
- Have you a good story to tell? Investors will want to see a management team that understands its market, and the competition; they will want to join the Board and provide active support to the company through its growth phase; they will want to have the opportunity to sell their shares – at a considerable profit of course.
- Have you thought through the consequences of inviting a stranger with money into the management team, albeit as a non-exec Director? They will want to impose some constraints on how the business is run.
- Are you ready for the costs? This is not merely the cost of perhaps using a reputable network, lawyers for the contacts etc, but the time that the management team will have to spend in talking to investors; time that they cannot spend in running the business.
This is not to put growing companies off the idea of bringing in fresh capital – the right investor makes all the difference – but to ensure that entrepreneurs are prepared for the road ahead.
Give careful thought to the Business Plan. It is a key marketing document and will reflect the personality of the management team. The plan needs to demonstrate, in a cogent and readable form, that:
- The team understands its market, and particularly the competitive pressures, now and in the future, that it will face.
- The product or service is viable, robust and easily explained.
- The management team is credible – i.e. they have sufficient experience in running a business. After all the investor will be relying almost entirely on the team’s skills to turn his investment into profit.
- There is a robust business model – the profit forecasts are realistic and achievable, peak cash flow needs are readily identifiable, the effect of slower or lower sales on profit and cash is clear.
- The investor will get what he wants – a seat on the board for a fee, a reasonable share of the equity (management will always overvalue their business, investors undervalue it!), a chance to make a difference through his experience and contacts, and a potential exit route.
If the plan covers all this properly, the team has a good chance of attracting the right investor.
Originally written for fundingforgrowth.co.uk.