Funding expert David Pattison offers a series of tips to ensure innovators and startups are well prepared to grow their business
Anecdotally there is a lot of money to be found in the investment markets. Young businesses are conditioned to believe that this money is easy to get and that taking on investment is the only way to grow their businesses.
The truth is that raising investment funds is often a very difficult process that takes time and a lot of effort. It is distracting and almost always has some effect on the business, and never in a positive way.
What can SMEs do to prepare for their investment journey and get the best deal for the business? Before answering that question there are a couple of questions that all businesses looking for investment should be clear on: do I really need to raise money? And; can I grow the business without funding?
There is an expectation, almost a model, for early-stage businesses to grow through taking investment funds. Of course, there are some businesses and some sectors that will need money, and that might be money that the founders don’t have. In manufacturing, or heavy research and development businesses, it is obvious that funding will be needed.
If it’s a “bubble” business that needs to grow quickly to catch a trend then, again, it is clear that investment would be very helpful in maximising the business potential. But the availability of relatively cheap cloud-based tech has meant that many businesses have access to affordable tech infrastructure. If all funding brings is an acceleration of the business by a few months then is it worth giving up significant shareholding for a relatively small gain? This is definitely worth thinking about.
Having said that, if you have decided to embark on the investment journey then good preparation is vital to a successful raise. Here are five of the things you should do to make sure you get the very best result:
Have a clear plan on what the money is for and how much you need
Investors want you to be very clear on what the money is for and will expect you to spend it against that plan. They do not get excited by plans to cover cash flow shortfalls or to pay the management team a big pay rise. They want to see how the spend is going to grow the business and increase the value of their investment.
They will also want to be convinced that the management team are all aligned to the plan and will do their best to implement it. This doesn’t mean that there cannot be a change of plan post investment stuff happens. But that change will need to be agreed and well presented to get agreement. Having a clear and costed plan is a must.
Understand that investors only care about one thing
Without taking their side, it is always worth looking at your company and your investment through their eyes. The one thing you really need to understand is that investors only care about one thing and that is their money and how much money they might make.
This isn’t wrong but it’s something you really need to understand. If taking money from an institution such as a Venture Capital or Private Equity fund, then their investors only have one measure of success and that is how much money they make from their investments. Post-investment this will always be the case and you cannot be surprised when in investor might make a decision that is beneficial to their investment but may not be helpful to your business. Remember that investors only care about their money.
Give yourself time to raise money
Because the investment market seems to be flush with money the common belief is that raising money is easy and fast. Almost every business looking for funding underestimates the amount of time it takes. Early stage, relatively small investments through seed funding or angel investing can be pretty fast, but if you are looking for serious money from institutional investors then it always takes longer.
In my experience this process can take between six and nine months and sometimes longer. The investor will want to go through a due diligence process and will almost certainly want you to sign up to an exclusivity period where they look, in depth, at your business. One way of ensuring that time doesn’t drag on is not feeling trapped into extending this exclusivity period. Some investors will try and extend the process so that you get to a point where you are running out of money and will try and renegotiate the deal terms. Make sure you always have time built into the process.
Get the best help you can afford
Most young businesses see help as a cost. You must look on help as an investment that normally pays for itself in a very short period of time. The best lawyer you can afford is a must have. They will make sure you are not signing what seems like unintelligible legalese and should steer you away from clauses that will come back to haunt you at some point in the future.
Good financial management is always impressive to investors. For younger businesses a heavyweight CFO is often unaffordable but there are lots of outsourced finance management options that perform well before you hire your in-house finance function. They ensure that you collect money on time and know where you are financially. There are a lot of experienced non-executive advisors around that can help you steer your way through the investment process. Choose wisely and they will help you avoid the pitfalls of the process. But make sure you do choose wisely. Regard experienced help as an investment not a cost.
Be ready for due diligence
Always try and be the best business you can be. It sounds obvious but nothing is more impressive than a management team that knows its business, its market, is well set up legally, even just knowing where everything is. The “everything” would include all the legal documents, the contracts, and the financial information. You should aim to run your business as though you are always about to enter a due diligence process. In this process you will be asked to set up a data room. This will be a digital “room” with all the documentation that is relevant to the business. Why not set one up from day one? Due diligence can also look hard at your tech, your management, your finances, your business practices, commercial strategies and much more. It’s a tiring and distracting process. Do not get fatigued by it and get your lawyer to help maintain the deal ’energy’.
Remember that due diligence is a two-way process. Push back if the demands are ridiculous and make sure you do due diligence on the potential investors. You need to understand who you will be dealing with into the future. Be ready for due diligence and don’t underestimate how demanding it will be.
The investment journey is a tougher process than you think it will be. It will set the tone for the future of your business. Mistakes made in this process are almost impossible to rectify post the events and will just magnify in size as you take more money in the future. Good preparation is the key to getting the very best deal for your business. Investing time in preparing is time very well spent.
ABOUT THE AUTHOR
David Pattison is a startup funding expert, business chair and mentor, and author of ‘The Money Train: 10 Things Young Businesses Need to Know About Investors’. The book won best Startup / Scale-up book at the Business Book Awards 2022. The book is available to buy on Amazon.