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5 Top Tips For Raising Investment In Your Company

Posted on Mar 05 2008

5 Top Tips For Raising Investment In Your Company
By Andy Warren

If you want to grow your company then one of the best options is to raise more finance to support that growth. However, raising finance doesn’t come without risks. You need to make sure you know what you’re getting into and, more importantly, how to get out.

The biggest challenge most business owners face is how to even get started on raising finance. So here are 5 top tips for raising investment in your company.

1. Have a great business plan

Although it’s true that many investors don’t even read the whole business plan this doesn’t mean you can ignore it. A great business plan is an essential part of your business and going through the process ensures that you think about all the different elements of how your business is going to work. It’s no good having great expectations on sales if you haven’t thought through how you’re going to market the business to generate the leads to convert to sales. A business plan gives you focus and allows you to cut away those elements of the business that obviously don’t make sense.

An investor will be looking to the business plan to show that you have considered, researched and planned your business. You don’t have to produce reams of paper but you do need to show you’ve given serious consideration to all the critical factors in your business and market. And make sure you know what’s in your plan.

The plan alone may not be enough to raise the money but it’ll be a whole lot harder without it.

2. Be realistic in your forecasts

There’s nothing worse for an investor than scratching the surface of a prospective investee’s financial forecasts and finding there’s nothing but hot air, hyperbole and broad assumption.

Every investor has seen plans that say something along the lines of “if we can get just 1% of this £8bn market, then we’ll have revenues of £80m”. And those plans and forecasts have a tendency to go straight to that great shredder in the sky. Be realistic and show that you have some valid justification for how you’re going to reach the numbers you’re forecasting.

If you have marketing spend (and you should) then show how that translates into sales leads and how those get converted into sales. Create financial models that underpin the numbers. If you’re expecting to convert 75% of all prospects then you had better have a fantastic justification for how and why. Most businesses simply don’t achieve this sort of conversion rate and you will lose credibility very quickly with this type of assumption.

The reality of business is that even with realistic forecasts, sales usually take much longer to be achieved and costs are usually much higher than expected. An experienced investor will look at your forecast and check that they still work with half the sales and twice the costs to check the risk in the business.

If you’re going to build your forecasts yourself then educate yourself in the best approaches and if you’re going to get others to help then make sure they have the right knowledge and experience.

A solid forecast won’t guarantee investment but a shaky one will receive a definite “no”.

3. Show the investor what return they can expect

The best investors only invest when they have a high certainty of the outcome. Successful investing is about knowing what return you expect to make. Anything else is speculation and gambling. When an investor puts money into a business they want to know what they’re going to get and when.

As part of your plan and forecast, you need to build in a realistic and achievable exit strategy. This allows the investor to get their money out, with a decent return on it.

Many investors, private equity firms and VCs will invest in a portfolio of companies. They go in with the expectation that each one will succeed but they know that overall some will and some won’t. The trick is to ensure that the gains on the good ones more than outweigh the losses on the bad ones. To do this they will often be looking for a return of between 3 and 5 times their investment within 3 to 5 years. Different investors have different criteria but this works as a general rule of thumb.

The return on the investment for the investor is really determined by 2 things. How much they put in and how much they get out. That’s why investors will push for more equity for their investment, as it increases their potential return on exit.

If you can show a decent return, in a reasonable period, to the investor then they’ll be more inclined to back you. If you can’t then they’ll take their money elsewhere.

4. Practice your presentation

It’s said that investors invest in people and this is most obvious when a business owner presents their business case to prospective investors. You may have the greatest business proposal and CV in the world but if you can’t string 5 words together in a sentence then an investor will lose a lot of faith in you.

If you’re not used to presenting then it can be scary. If you’re not used to the tough line of questioning that can sometimes come from investors then that can be daunting. And if you haven’t prepared then you’ve effectively blown it before you’ve even walked through the door.

Investors are not ogres, although some are quite curt and don’t like wasting their time or concentration. So you need to prepare carefully, anticipate and address the areas of potential concern, listen to their questions and answer them clearly, succinctly and honestly. If you do all this then you’ll have a much stronger chance of succeeding in raising investment.

If you prepare and practice and build your own confidence in what you’re presenting then you stand a much greater chance of being financed. If you try to wing it and expect to convince investors with the sheer force of your personality, charm and cheesy sales techniques then a used car lot awaits.

5. Know what you want and what you’re prepared to give

This may sound obvious but it’s the cornerstone of any negotiation. And this is a negotiation from the very beginning. You need to be very clear about what you want and be willing to walk away from the table if you can’t get it. You also need to understand that you won’t get something for nothing and know what you’re prepared to give which could include an equity share in your business, security on your business assets and your own assets, commitment to pay high interest rates on loaned money and covenants that will obligate you to frequent detailed reporting and the potential to have all your assets and your company taken away from you.

Now if all that hasn’t scared you off yet, then you also need to be aware that an investor is probably going to be looking to get more than you are prepared to give and you’ll end up in some element of negotiation.

You need to understand what the investment will do for your business, and what will happen to the business without it, and decide whether the sacrifice of equity is worth the investment.

You’ll also need to consider what it will really mean if the equity given for the investment hands ultimate control of the business to the investor. That’s a serious step and needs to be taken very carefully.

Ultimately, although you want to negotiate, you need to be realistic about what you are asking for. In proposing an equity share for an investment you’ll be assigning a value to your business. And that value will be challenged, so be prepared to back it up. Investors get very tired of business owners trying to convince them that their start up company with no sales warrants £1m of investment for 10% of the business. It’s unlikely you’ll be able to justify a £10m valuation on an empty space, a few bits of paper and a big dollop of enthusiasm.

If you know your desired outcomes and you can justify them, you’ll be in a better position to negotiate. If you’re walking around in a dream then you’re likely to get a rude awakening.

If you’re not sure on any of these areas then make sure you get some professional help. It’s a lot better to invest some time, effort and money up front to get the right approach then to waste many months and even more money learning the hard way. Think about what it costs you personally for each month that your business growth is inhibited. When you look at it this way, getting the right support in early can save you a lot more in the long run.

Andy Warren is the Managing Director of Marshall Keen Ltd. He is a chartered accountant and successful CFO and entrepreneur with extensive experience in M&A, Corporate Finance, Business Growth and Exit Strategies. Marshall Keen http://www.marshallkeen.com specialises in providing CFO services to early and mid stage businesses, particularly in the tech sector. Marshall Keen also provides support for companies seeking to raise finance through Funding Decisions http://www.fundingdecisions.com

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