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Top Tips For Raising Capital With Investors By Bill Anderson

May 17, 2016

I’ve met with a number of clients over the past few months who are raising funds with Investors and I have highlighted below the things which I believe are required by Businesses if they want to be successful at raising funds with Investors.

  1. Investor Ready - You need to packaged as attractively as possible so that when you meet a potential investor they see a turnkey investment which is ready to accept their money. You need to be able to sell you, your company and your vision and do it in an Investor friendly manner. If they like you then they will listen to your pitch far more carefully. You need to focus on the key benefits to them of being an investor. Practice your pitch with family, friends and business colleagues.
  1. Sector - Your business must be operating in an attractive market sector. Your proposal needs to highlight the business opportunity and its related projections, how the invested funds will generate more profits and where. If you are using funds to grow the business but it’s not profitable yet, then the investor will need to be convinced that it will become profitable because of the growth potential in your market sector. An easy to follow business projections sheet is very important here. I would recommend showing 5 years projections with each year breaking down the income and expenses. I would also recommend using visual aids such as graphs which show in a user friendly manner the growth in turnover and profits year by year.
  1. Scalability - You need to be able to demonstrate an opportunity for explosive growth. The plan should include how you are going to scale the business and grow over the next 3 to 5 years.
  1. Use of Funds - You need to show how exactly you plan to use the funds. You cannot use funds to increase salary, that’s a big no-no. Product Development, Marketing, Hiring a Business Development Manager are all valid reasons for raising funds.
  1. People  
    • Management Team - You need to show that your company is being managed by a competent fulltime management team with a strong industry track record with an on-the-ground presence. Put together a one pager for the key management team which highlights your relevant experience, skills and track record.
    • Board - Do you have a board. Some well experienced specialists who consult with you and your team to give practical advice. Does it have an Investment representative who ensures that Investors are kept in the loop and who manages the Investor relationships. Ideally have someone who has already set up and launched their own business or someone who does this for a living. There must be a strong commercial mind-set on the board. Who they are and what benefits do they bring to the business. Expertise and oversight of the strategy of the company… a couple of the management team should be on the Board.
    • Employees - Are one of your biggest assets. Are they locked into the business? Are they fully committed to you and the venture? Key revenue generating staff need to be insured so the business is protected should they have the misfortune to get seriously ill or pass away.
  1. Valuation - and entry cost for Investor must be at right level to be attractive for them. Premoney valuation must be set at a realistic valuation. How do you value your current business? Is it realistic? Too high a valuation will put off Investors. Too low is a waste. Look at comparable ventures which are in your sector. Accountants, Lawyers, Private Equity or Corporate Finance Advisers can be very useful here to get a feel of what is the range for your business valuation. If your business is already trading and profitable then you will get a better valuation as its easier to validate. If your venture is not making profits yet then you need to check the market for similar ventures to get a feel however, you will not get as good a valuation until you are trading and profitable.
  2. Risk v Return-Investor Package - You need to be able to show the Investor that their risk is rewarded enough to make it worth their while. At the same time, you need to be able to afford the funding. Structuring your investment is key to how to you attract Investors and not giving away more than you need to is very important. How you put together the terms of the investment is also important-i.e. Equity, Convertible Loan Notes, Grace period etc. Look at it from the Investors point of view-they have other investment opportunities which will be packaged very professionally so you need to be able to compete here. Ideally you should use advisers who will help you put your information together in to an investor friendly document which is visually easy to follow. Have a look at Investment fund brochures to see what quality Investors are used to seeing.
  1. Competition - There is a lot of competition raising funds out there so you must present a very compelling offering. Research your nearest competitors, their strengths & weaknesses. A strong competitive positioning must be made. Examples of USP might include specialist staff, unique product, First-to-Market, very efficient execution, Unique Technology etc.
  1. Exit - Realistic exit plans must be demonstrated showing a 3-7 year timeframe usually by identified trade sale or Management Buyout. Expo 2020 is a great event to plan an exit around if your business model is already up and running. There will be a premium for business valuations looking to target that exit point.
  1. Numbers - You need to know your numbers. Investors will expect you to have them memorised.
    • Turnover-What’s your annual Turnover, Gross & Net Profit percentages? How do they compare with previous years? What are the future projections based on? Fixed or Variable costs?
    • Numbers need to be compelling enough for any investor to be encouraged that there is a profitable and viable business which they can invest into and ultimately get their money back plus a return at a future date.
    • Financial Accounts-3 years audited (if available) additionally show Management Accounts for the most recent period. (Required to create business plan and valuation)
    • Cashflow-Focus will be on how you have managed this up to now. They will most likely want to see bank statements. You need to show that you have a cashflow plan and manage it actively.
    • Profits & Pricing-What are your profits to date and are your margins maximised already or is there room for growth? Investors are not just interested in volume and if you are not running the business as profitably as you could be then they won’t be interested enough to invest.
    • Costs-Minimise costs where possible and maximise your pricing where you can. More funding isn’t going to help with these matters.
  2. Investor Security & Insurance
    • Guarantee - As you probably don’t have business assets to offer as security then you will need to look at either a personal guarantee or a higher than normal percentage of equity in the company.
    • Shareholder Insurance - To reduce the risk to investors you need to put in a Shareholder Protection policy on your shareholders. This would look at providing a serious illness/life insurance payout on the value of the company plus any loans/investment made which would provide assurance to the Investors, that should there be a death or serious illness with one of the key shareholders/partners that a cash lump sum would be available to the business which would ensure the business can continue and or has the ability to pay off the Investors/Successors.
    • Legal Agreement - This also needs to reflect the successor set up in the event of death or seriously illness for key shareholders.
    • Directors & Officer Insurance - needs to be in place.
    • Malpractice needs to be in place if relevant.
    • Professional Indemnity needs to be in place if relevant.
  1. Key Staff - Protect your most important Assets
    • Keyperson Insurance - All your key sales staff and key personnel in the business should be insured so that if they die or get seriously ill then the company would receive a pay-out which it could then use to either (a)recruit an alternative consultant and/or (b) pay the affected consultant until they return to work.
    • Attract & Retain Key Staff with End of Service Pension / Company Savings Plan - A scheme should be implemented whereby the company funds x% of a key employee’s salary into a staff savings plan. There is a vesting period which could be set at 3-5 years whereby the staff member only gets these contributions on attaining a certain number of year’s employment with the company. It’s a bonus effectively which keeps the key employees tied to the firm. This is very effective at keeping key staff from leaving the business. Typically, skilled staff working in the UAE are a precious commodity and they will move for relatively small increases in their salary once they settle into the region. The Savings plan is a very cheap way for the company to keep their talent. It also allows the key staff member to contribution their own amount to the savings plan which is seen as a benefit similar to what they would have as a Pension in Western companies.
    • Recruitment - Attracting and retaining key talent in the region is challenging. Having a relationship with a key recruitment agency in the sector would be advantageous and will demonstrate to Investors that you are focused on keeping your key resources in place.