What are potential investors looking for in a company? They want to see research and establish the potential risks and returns involved in investing. Do you know who to approach for finance, and how? What do they expect from you, what are the legal issues, what documentation will you be expected to sign? Should you offer personal guarantees or other security?
Nearly every business being launched will require some investment capital. If you can rely on savings or family and friends for seed financing that is a great start. Many banks and investors will expect to see that you and your family have invested in the venture.
But, most entrepreneurs will need additional financing to get a business started.
Check if there are any starts up or support grants in your area.
If you have a business idea that could benefit from an injection of capital, the most usual financing route is Banks or venture capitalists. Angel investors are becoming more common, and crowd funding is a growing source of investment.
In these days of austerity, raising finance is more difficult and expensive than ever. You should have a business plan in place that will enable potential investors to see you have a realistic grasp of the costs of the business and a commercial plan in place to offer them a return on their investment.
Ideally, Investors will want to support firms with good cash flow management, a strong balance sheet, a sound business plan, a well-balanced management team, a good business record, and who are looking to develop and grow.
If you are a start-up, there are limits to which of these boxes you can tick, but at least put yourself in the best light by having the others ticked!!
You need to put some real effort into preparing a business plan. Don’t just mindlessly fill in a template. This needs to be a well thought out document, with particular emphasis on how you are going to achieve projected sales.
Venture capitalists and financial institutions need to ensure that their money will be well invested. They will expect you to “pitch” your product or service to them. They will want to establish the potential risks and returns involved in doing business with you.
Having your market research and business plan well prepared demonstrates to potential lenders that you are serious, have thoroughly studied your market sector, your potential customer-base, and your competitors. And that you are prepared for the possible financial hurdles ahead.
When it comes to raising debt or equity finance there are a number of legal issues to consider carefully .You will be asked to sign standard documents, the small print must be read and understood before you sign them. Be aware of the fees you are accepting.
Investors will expect you to check carefully what you are committing yourself to. So if you are not clear what something means, ask for clarification. Be clear at the outset about any strings attached to the finance that are mentioned in the documentation. Ask for a detailed term sheet early on in the process.
They may ask for personal guarantees or other security, and may set financial covenants. You should be wary of using your home as security, and be sure covenants are achievable and clearly understood.
Crowd funding is the current alternative trend in raising finance. While banks are still reluctant to offer competitive finance, small businesses are searching for alternative sources of investment.
Similar to Angel Investment, Crowd Funding is a way of raising finances by selling part of your equity. The main difference is that instead of there being just one investor, you sell your investment idea to a crowd.
The success of Crowd Funding has disrupted the investment business, giving entrepreneurs the opportunity to access funding from the masses, without the usual upfront fees. The winners seem to be those with the highest social capital or largest database. It demonstrates the value of trusted relationships and an engaged network.
Business investors want to put their capital behind exciting new projects. Many are finding that more traditional forms of investment are showing very poor returns. They appreciate that with new businesses sometimes an exceptional Return on Investment (ROI) is achievable. Some enjoy the spirit of adventure.
All of them will be successful business people in their own right, they are often strong-willed, determined, dedicated and hard-nosed. These days it is as much about the entrepreneur choosing their investor as the other way around.
Currently in the UK the Financial Services Authority (FSA) views Crowd Funding as a raising money for funding from the public, which is currently illegal unless approved by the FSA.
So check that your chosen Crowd Funding platform complies with the relevant authorities, or you could put your business and yourself outside the law.
Be aware that investors will want to see some detail of your business before investing. This could leave your idea vulnerable to “copying”, so when you are drafting your business pitch for potential investors, provide enough information to attract attention and interest, without giving any vital information away. Then, when potential investors come forward, ask them to sign a NDA (non-disclosure agreement) before you provide further information.
A common error Entrepreneurs seeking additional investment often make is underestimating their funding requirement. Then when the finance is agreed and provided, they may find that they need more capital. This can be very damaging to the relationship with the investor and will leave you short of funds to complete your plans. So ask for a little more than you think you actually need so that you have a reserve or contingency fund.
If used properly, Crowd Funding can be more successful than sourcing the full investment required from a single individual or organization. But make sure you have done your research and taken precautions to protect your business and yourself.