There may come a time when your company will need external investment to break through its own financial ceiling and enter a new chapter.
As outsourced finance directors, we have many years’ experience in helping business owners find the right investors for their project, and navigate common hurdles that can often derail even the most experienced of entrepreneurs.
Here’s a quick guide that will talk you through how to get your business ready for equity investment, and what you can expect from the investment process itself.
Firstly, ask yourself: what kind of investor are you looking for?
Obviously, you want to obtain funding from an individual (or team) that is passionate about your project and has some sort of experience of or affiliation with your sector. But there’s more to consider than how enthusiastic this person is about your venture.
What are their expectations in terms of ROI? How long are they willing to wait for their return? Do they see themselves investing in your business in the long term, or is this a short-term addition to their portfolio? And if you’re expecting day-to-day support from them as well as financial aid, what value will they bring into the mix?
Get clear on what you want from your investor and be prepared to say ‘no’ to people who do not fit your criteria.
Determine how much money you need
It will be tricky to ‘sell’ your proposition if you can’t explain why you need your investor’s money, and how it will be spent to benefit your business (and guarantee those all-important returns). If you don’t have much experience in this area, getting advice from our finance directors can be invaluable. They can put together realistic forecasts that will help you determine how much funding you need, and where it needs to be placed for the fastest and most effective growth.
Certain types of investors may not be able to give you the cash you need to achieve your goals. In this case, it may be more appropriate to approach a syndicate (a group of investors who have decided to join forces) or a larger private equity house. If you are a start-up or you have particularly ambitious ideas, you may also want to consider embarking upon rounds of investment to unlock more funding as your growth strategy matures and you can prove its effectiveness.
Prepare your pitch
This is a vital step in the investment process, and one you cannot afford to overlook.
It’s your job to convince investors that your project is worth their time, energy, and funding. With this in mind, your presentation template should include:
- More information on your background and your story. People buy from people – and your investors will want to see that you are a credible, capable individual who is worthy of their trust
- Why you started your organisation in the first place
- The problem your business is trying to solve – and the challenges that are currently standing in your way
- The solution you are proposing – and the roadmap you’ll need to follow to put this into practice, in the form of a business plan
If you are not a natural ‘presenter’, practice will make perfect. Or, you could give somebody else the responsibility for delivering the initial pitch; someone who is much more comfortable with public speaking and answering questions under pressure.
Understand the value of your business
Knowing how much your business is worth will help you understand how much equity it is reasonable to sell for a given amount of investment, considering your market position, your financial situation, and the potential risks and returns.
You should assess your company’s capital structure, the market value of its assets, and its future earnings, along with how well it is currently being managed.
Be open to any and all connections
How you find the most suitable investors will depend on many factors, including your company’s size, type, and, of course, its financial requirements.
You can approach potential investors directly via phone or email; you can attend specific investor events in the hope that you will meet your perfect match organically; or you can ask family, friends, colleagues, and even your wider network for their connections and recommendations.
There are also plenty of initiatives in the UK that are dedicated to introducing business owners to new investors, including crowd-funding schemes. For example, the UK Angel Investment Network is a fantastic starting point for newer businesses.
Agree your terms
Be ready to negotiate. Your investors will want the best possible deal (they are here to do business, after all!), so they may counter your proposal with a new offer. Be sure to read their term sheet carefully and ask your finance director and/or a legal representative to confirm they are happy with your investor’s terms and their implications before you proceed.
Be prepared for your investor(s) to conduct their due diligence
From verifying your business valuation to researching your industry, drilling down into your business plan, and getting to know your team on a deeper level, your investor will want to do their homework before committing pen to paper – and they are perfectly within their rights to do so.
Be prepared for (often tough) questions but know that their due diligence is in fact a sign that they are seriously considering entering into an agreement with you.
Interestingly, there are parallels between searching for investment in your business and planning to exit your business. In both scenarios, you need to ensure your company is trading well, has good future prospects, and is in a secure financial position. You can learn more about what’s involved in exiting a firm here.