Here are six steps you need to take if you are looking to raise funds for your business:
Identify whether you need equity or debt – or a combination
All of the money doesn’t need to be raised as equity, which has massive implications for dilution. Most business owners forget the debt option; this doesn’t affect equity at all and can be a quicker and easier source of funds. For example, Funding Circle in the UK will consider lending to a company which has a two-year history.
A combination of debt and equity is often the ideal solution, as this enables a cheaper cost of capital for the company, as the debt is entitled to interest rather than a dividend, making it less expensive for the company.
30% equity and 70% debt is good ratio and can make the company easier to manage. This is generally the accepted ratio which tax authorities and capital providers like to see. This usually makes the company more likely to attract further equity investment, as the potential shareholders can see that the management has understood that debt needs to be part of the company’s financing strategy.
Create a robust financial model
Put all your figures into a spreadsheet and test them. Try out a number of different scenarios – see what happens to the numbers. It is a good idea to prepare some of the more likely scenarios so that they can be shown to potential equity investors and debt providers. This will demonstrate that thought has gone into the financial model and you are prepared for different outcomes.
In addition, you must show the different types of returns from the different sources of capital, cashflow for at least the next 12-18 months, and any dependencies which need to be managed – this will highlight your professionalism and show the investor and debt provider that you are being sensible and serious.
The key is that the financial model must be robust. Don’t underestimate the importance of the financial model – a poor financial model will kill your funding request.
Be realistic about your valuation
Valuations are key to the fundraising process and it is important not to be delusional about the value of your company. To get a sensible, realistic idea of the value of your company, compare the most recent valuations for transactions in the space and ensure you have a balanced perspective. Don’t pick an outlier valuation, see what all the values are and pick something in the middle. This will show potential investors that you are being reasonable rather than fanciful, and make them more likely to invest.
Decide who to approach for the money
Depending on the scale of the ambition, there are some people who will back raw start-ups with no less than an equity cheque for £100 million, for example, Sola Bank and Baldetton Capital. At the £1–5 million arena, there are EIS/SEIS and VCT funds, and plenty of pools of EIS investors. This is where a firm such as ours can be helpful in providing introductions and knowledge of the market place.
For smaller amounts there are Angel Investors. The best place to start is by contacting the Angel networks. A Google search will help you here. You need to dig into each one to see if you meet their criteria. There is often an up-front fee for being introduced to the Angels in the network – so be sure the Angels are right for you, and you for them, before you start. In some cases, the Angel Networks are sector specific.
Ask your network for recommendations and introductions – these are often the best investors and debt providers, and they have come through a personal contact. Also, approach your family and friends. Every small sum invested adds up – and can help give you the seed that will attract a bigger fish later.
Do your research and make contact
Once you have drawn up your list of people to contact – work through it systematically and methodically – and always follow up.
When making contact, preparation is key. Target your funders carefully, do some background research on them so that you know you are contacting the right people, that your business is in their sphere of interest and at the right stage for them, and that the amount of money you are looking for is appropriate for them.
Fundraising is partly a numbers gain – so make sure you contact enough funders to push the odds in your favour.
The one-pager and follow-up document
It is essential to prepare a one-page summary of the opportunity. This should be the first piece of information you send out – don’t bombard people with lots of information. It should include a summary of the opportunity; what investment is being sought and what kind of business is going to be generated as a result, including a potential return if it’s possible to identify that. It must be an accurate summary of the business; be clear, concise and easy to read and understand.
Once a potential funder is interested they will then want more information. Approach this as a stand-alone sales document – one that does not require you to be standing there explaining it.
It needs to answer the following questions:
- What is the business?
- Who are the management team?
- What is the market size?
- What is the opportunity within the market?
- How much money is needed?
- What is the money going to be spent on?
- What kind of business will be created post investment?
Finally, it’s important to remember that fundraising is a combination of a sales project and a numbers game; you’re going to have to sell the business to a lot of potential funders before you find the perfect match.
About the author: Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including: raising equity and debt capital; mergers and acquisitions; interim management; board management and governance; deal structuring; and company turnaround.