Guide to Raising Finance

 

One of the biggest challenges that entrepreneurs face in starting, running and growing their businesses is finding suitable funds. Raising finance for a business venture requires determination, courage, preparation and focus. It is not for the faint-hearted!

 

There is no shortage of businesses wanting investment – just a shortage of good businesses. Most proposals are rejected by investors after the initial review. Only a small number – fewer than 1% of the proposals get funding.

 

You can increase the odds by knowing what investors are looking for and avoiding some of the pitfalls.

 

What do investors look for?

 

Investment criteria vary, but most investors will be looking for businesses which meet the following criteria:

 

 

A. The Team

 
Honesty
 

Plans and ideas do not get funding, people do. Therefore, honesty and integrity are vital factors in persuading investors to let you manage their money.

 
Personal qualities
 

The business world is full of people who are clever and conversant in current management concepts and fads. In short supply are people who are wise – people who are discerning, reflective and are less vulnerable to quick-fix remedies. Investors will back people who are focussed, pragmatic and wise.

 
Financial commitment
 

To attract investment, you need to invest your own money in your business. If you are not prepared to risk your own money, investors are unlikely to want to risk theirs. This should be new cash going in; the fact you have already invested thousands of dollars and hundreds of hours does not cut much ice with many investors.

 
Market knowledge
 

As the rate of change continues to accelerate, yesterday’s winning strategy may become today’s losing strategy. You need to know every intimate detail about your market, customers and competitors. You will need to be market-focused, rather than product-focused.

 
Business acumen
 

Investors want to make sure that you can actually run the business successfully, rather than just write a business plan about it or talk about it.

 

Investors look for entrepreneurs who are aware of the challenges they are facing and who do not seek to conceal them. On the contrary, they know what they are good at and they are looking for partners who can make up for their shortcomings and help them to overcome these challenges. This type of self-awareness and realism comes from years of experience and lessons learnt.

 
Economy
 

High salaries and perks for the directors and managers before the venture is profitable will send negative signals. Money should only be spent on the must-have things, not on the nice-to-have items. If the business is going to survive, the salaries should be paid by its customers, not by its investors.

 
 

B. The Business

 
High return
 

The business opportunity must have a realistic chance of achieving a high return on capital – Internal Rate of Return of 40% per year is a good starting point. It may seem high, but it is commensurate with the risk – investors lose money on more than 45% of the deals and need to do very well on the ones which are successful to show an overall positive return.

 
Realistic financial forecasts
 

You need to ensure that the financial forecasts are realistic and credible. Plucking numbers out of thin air will ensure that your proposal will be discarded by investors. For example, if your forecast shows sales increasing 100% per year, you had better have a convincing marketing strategy to back it up.

 

You must have a comprehensive business plan with detailed financial forecasts showing what could happen in the best possible case and a worst-case, if things do not go according to your plan (as they often do not).

 
High growth potential
 

Investors look for rapidly growing markets mainly because it is easier to obtain a share of a growing market than a mature or stagnant market. Smart entrepreneurs will try to identify high-growth potential markets early.

 

Static, ‘lifestyle’ businesses (such as single restaurants or retail outlets) are of little interest to investors.

 
Intellectual property
 

Having a trademark, copyright or patent can be attractive to the investor, as long as it acts genuinely as a clear barrier to entry or secures a competitive advantage, rather than just being there for the sake of it.

 
Investment ready
 

The business must be investment-ready with a fully developed product or service. 

 

Examine risks
 

You must address the critical risks and problems that the business may face. Investors will generally be aware of some of these risks, so failure to address them will undermine your credibility. Investors would rather back cautious optimists than reckless gamblers.

 
Exit route
 

After putting their money in, most investors want to get it back within five years, either through trade sale, sale to other shareholders, refinancing, or, rarely, flotation. You need to demonstrate a genuine intention and ability to provide such an exit.

 
 

What are the most common reasons investors reject proposals?

 

When investors read business plans, they are looking for reasons to love the business, but they are also looking for reasons to discard it. As soon as they spot a red flag – regardless of how good the rest of your plan is – your chance of getting them to invest will evaporate fast.

 

The following are the most common reasons for rejection:

 

  The management team lacks relevant experience.

 

  The management team lacks market awareness.

 

  The product/service has not gone through market validation.

 

  The financial forecasts are unrealistic and are based on too many assumptions.

 

  The financial returns are inadequate.

 

  The amount of investment requested is too high and the equity offered is too low.

 

  The business is too complex.

 

  The business is not scalable.

 

  The business has no clear exit strategy.

 
 

Investors need to believe and trust the people behind the business. Belief can be conveyed through the information provided in the business plan. Trust can only be established via meeting with investors. Thus the quality and credibility of the information in the business plan will help to open the door; the meeting will help to convince the investors that you can deliver the results.

 

Investors have many options – it is a competition, so you need to sell your proposal as the best option for their investment.

 
 

Why is it difficult to raise finance for start-up and early-stage companies?

 

Due to the riskiness of businesses – especially start-ups and early-stage businesses – only a small number of businesses get funding from investors.

 

Entrepreneurs need to first understand whether their business fits into what external investors want before pursuing them. Otherwise, it is simply a waste of time, money and energy on an elusive goal. 

 

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