There will come a time when ambitious businesses may need additional funding to take them to the next level. For scale up brands with their own unique cultures, finding the right investor to build a strong, trusted relationship with is particularly important. But how does a business find the right investor and what steps can it take to make sure it is an attractive prospect for investment? Natasha Frangos, partner at haysmacintyre offers her step-by-step guide.
Getting investment ready
A business looking for an investor should have developed a compelling story of its journey. Identifying any key milestones thus far, including key sales accounts, team appointments and product developments, cementing its place in the wider market and pinpointing any USPs are all factors that help build the business story. It is important that a business is in a position of strength before going out to market and has a well-developed plan of where the business wants to go next. As such, timing is a key factor in preparing for investment.
It is worth remembering that people invest in people, and no matter what stage a company is at, an investor will want to work with individuals who are well-equipped to speak about their businesses, why it will succeed, and who cope well when critiqued. Business owners who can clearly articulate their market position, speak passionately about their brand and demonstrate a robust knowledge of business will do well when engaging with potential investors. A strong, capable and compelling management team also make the decision-making process easier for an investor. One person cannot do it all and as such investors will be reassured by a founder having taken on a couple of key hires in the team who will support execution of the strategic plan.
Before meeting an investor, getting your house in order is crucial. All financial information should be up-to-date and to hand, including statutory accounts, employee information, tax filings and key contracts. Well-presented and tidy financials are naturally associated with credible and reliable business leaders – something businesses will do well to impress upon potential investors.
It is also essential to have a valuation of the business in mind before starting discussions about funding. Owners must calculate how much equity they are willing to give up for the cash they are looking to raise. However, flexibility is important. If the perfect investor comes along who could transform the business through their contacts or expertise, but who has a differing view on valuation, then a negotiation or compromise could be beneficial.
Finally, prepare a share capital table to show all of the shareholders and the percentage of shares held by them, pre- and post-investment. At this stage, it can also be helpful to introduce a share option pool, which allows shares to be allocated to the future management team or key strategic hires.
Mastering your financials
All investors are looking for credible business owners: someone who can talk with confidence about the finances of their business and its future potential. Knowing the numbers and understanding the management accounts is vital.
Before meeting investors, owners should produce an easily digestible summary of the business’ historical financial performance. This summary will support the story of the business that it is presenting.
Founders should review and understand their business’ pricing architecture, the volume of sales and the change in margins as the business scales. Understanding and being able to clearly communicate the working capital cycle is critical in stock holding businesses, explaining to investors the time it takes to transform investment in stock into profit.
Additionally, a founder needs to be clear on how much money they need to raise and what it is going to be spent on so that an investor can visualise the difference their investment will make on the business.
Financial modelling and planning
Having a strong financial model built with a key list of assumptions, linked to the profit loss, balance sheet and cash flow, rather than hard coded inputs, allows investors to visualise different scenarios and adjust forecasts based on these assumptions. The forecast should demonstrate the route to scaling up the business, modelling future revenue streams and targeting key markets.
If the business is currently loss making, investors will want to know when it is expected to turn a corner and reach breakeven point. This model will be used to plan business strategy going forward and be used to track future performance, so it is vital that owners have realistic expectations or it may come back to bite when targets are missed.
Finding the right investor
It’s not always just about the cash. Investors bring invaluable experience and expertise to help grow the business. Owners should consider what they are looking for beyond investment: is it a mentor, someone with a particular skillset at board level, or someone with great contacts.
The funding options that are available will depend on what stage the business is at. At an early stage, owners may look at friend and family funding, and as the business grows, onto debt finance or angel investment. However, later on in the company’s development, they may start look to at private equity investment. Understanding an investor’s key requirements and what they would like to achieve from their investment helps determine whether the match is right: if an investor doesn’t have sufficient depth of funding or doesn’t have the same outlook as the management team in terms of overall strategic direction, the outcome may not be desirable. An investor needs to fit with the company’s culture for a successful and healthy relationship.
Getting the best out of your investor
Remember that an investor has put their trust in the management team and in return they should receive open and honest communication. Investors don’t want to be drip fed bad news, so if things aren’t going to plan, inform them at the earliest opportunity. This will allow them to be best equipped to help and advise the business through difficult periods.
It is helpful to provide accurate and regular reviews of how the business is faring, so the investor is fully informed of changes and developments (both good and bad!). Building a strong relationship with an investor will help in bad times as well as good – if something does go wrong, you want to be in the best possible position to get the most out of your investor. Alternatively, if the business grows, investors can provide their experience of dealing with growing pains, such as dealing with the challenges of transitioning from founder to CEO as the team builds, or giving honest advice on how to equip the company to survive as it expands.
One common mistake is not being transparent with an investor about the state of the business. Being open and honest is vital for building a strong relationship and keeping any financial or administrative skeletons in the closet will only damage the trust in the partnership.
Unrealistic financials are common; their appeal during a fundraise soon wavers when the management have secured the investment and are then held accountable to delivering to those numbers. This will only dent the credibility of the team and mean the relationship with the investors doesn’t start off well.
It’s also important that owners set out to raise the correct amount of money for the business, which normally means a little bit more than what you think is required. Raising investment takes up a significant amount of management’s time, and business performance can be adversely impacted during this period. Additionally, the valuation of a business could be damaged if not enough cash is raised, requiring the leadership team to go back to market in a much shorter space of time than previously expected. On the other hand, raising too much money can be just as problematic as not raising enough, since equity is valuable and should be put to use carefully.
A challenge for some owners is that the dynamic of the management team will change when external stakeholders come on board. Business owners are no longer alone in choosing the strategy of their business and will be accountable for any decisions they make.
Finally, there are a number of tax relief schemes available, such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which make investment in private companies more attractive to investors and are worth exploring. Business owners should also consider if any of their activities would qualify for R&D tax credits or consider using Enterprise Management Incentives (EMI) schemes to incentivise key hires or the existing management team. Investors would expect the founders to have considered their tax reliefs ahead of presenting the offer.
There is much to consider when embarking upon this next stage of growth for a small business. Funding from an external source can offer significant leverage for growth, but it is important to be mindful of how best to approach investors, so that your offer stands out from the crowd, and to stand the best chance of securing the investors that are the best match for the business and its needs. Ultimately, the right investor will not only provide the right level of financial support, but also offer invaluable insight and expertise to grow and develop the business.