It's one of the hardest things in business to persuade tough, professional moneybags to invest in your company. Entrepreneurs will tell you how hard they found it to extract funding from private equity groups, venture capitalists or business angels. Many simply decide not to bother, leaving their businesses undercapitalised and cash-starved. Such firms rarely make the FTSE 100.
And the sea change in risk awareness among investors, no longer looking at life through pre-recessionary rose-tinted spectacles, means that finding finance is now doubly difficult.
If your business needs more capital, the first principle is: don't wait. It always takes longer than you think, so start looking for it a good six months before you need it. If you don't, prospective investors will take advantage and demand big slugs of your equity.
Always raise enough money, even if you have to surrender more equity than you would like. Raising too little and returning for more later allows investors to extract a high price for your original timidity. I once advised a printing business into which an investor had injected £400,000 for a 30% stake, but then demanded another 30% for providing just £50,000 more in a cash crisis that ought to have been predicted at the outset.
Establish whether your prospective investor has the appetite and resources for more rounds of funding after the first one. Switching horses in mid-stream or running two investors in parallel can be difficult and risky.
Investors will have a different attitude from your own, especially over their exit route. Confirm their agenda on this vital point before you sign any deal. Expect the VC firm to be looking to dispose of its stake in about three to five years - at a hefty profit. Also, find out how active your investors want to be. If they are sleeping partners just looking for a decent return, you may find their lack of involvement frustrating. But if they want to be more involved, can you live with their proactivity?
Choose an investor to match your needs. The best option is someone who brings the industry contacts and skills that your team lack, as well as their money.
Look at your assets before you start handing out equity. Can you borrow more, or on better terms, against them through specialist funders, such as leasing firms? If you expect rapid growth, a flexible invoice-discounting or factoring facility can be the perfect answer.
Surplus or underused assets can be turned into cash. I had a case where a manufacturing company nearly went under because it held on to outdated equipment; the owner didn't realise this had a good resale value in the third world.
Whether raising equity or loan finance, beware brokers and introducers; some of them add little value. Ask for recent references from previous clients and follow them up. When you find a good one, pay a low up-front capped fee on a success-only basis.
Success in fundraising depends on decent management information and a well-prepared, concise investment proposal built on realistic assumptions and highlighting the skills and experience of the management team. Investors are much more interested in people than in ideas and fancy forecasts.
Business plans should include a pragmatic analysis, which shows potential investors what happens when things change - as they surely will. Get investment proposals vetted by an experienced third party and take their advice: you are too close to your venture to be sufficiently objective.
Raising money will enhance your skills in presentation, financial forecasting and negotiation. These will be immensely valuable as you take your business forward.
GUIDE TO SUCCESSFUL FUNDRAISING
- Start early. You don't want to look desperate to potential investors.
- Aim high. Make sure you raise enough money in the first place. Going cap-in-hand for more later will cost you dear.
- Seek investors who add value, not just money.
- Identify their agenda, timescale and exit route.
- Assets before equity - think of what you can sell, or borrow more against, before giving away any of your business.
- Be confident, but realistic in your forecasting.
- Your business plan is fundamental. Get an objective outside view before you submit it to potential investors.
- Talk up yourself and your team. Investors are at least as interested in people as they are in figures.
- Nick Hood is an SME turnaround expert. Email him at email@example.com