By Clive Hyman FCA, Hyman Capital Services.
Raising funds is a requirement for many businesses but very few are actually successful. Let’s look at the questions you need to ask yourself and what needs to be done so that your business is one that succeeds in obtaining the funds you require.
What do you need equity, debt or a combination?
Too often people only think about equity. But, this has massive implications for dilution. Most business owners forget the debt option – yet this doesn’t affect equity and can be a quicker and easier source of funds. There are many debt providers who will assist early stage businesses providing they have the right management and the right track record. Funding Circle in the UK, for example, will consider lending to a company with a two-year history.
The ideal solution may well be a combination of debt and equity. This enables a cheaper cost of capital for the company, as it requires interest rather than a dividend.
Have you got a robust financial model?
Put all your figures into a spreadsheet and test them. Try out different scenarios – see what happens to the numbers. This will demonstrate that you are prepared for different outcomes. You must also 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.
Is your valuation realistic?
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, instead 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.
Where do you look for the funds?
For example, Sola Bank and Baldetton Capital work in the £100million arena. In the £1–5million area, try EIS/SEIS funds and VCT funds. This is where an introducer like us can be helpful in providing introductions and knowledge of the market place.
For smaller amounts contact Angel Investors. A Google search will throw up lots of results of Angel networks and then you need to dig into each one to see if you meet their criteria.
Ask your network for recommendations and introductions, and approach your family and friends. These small amounts add up – and help give you seed that will attract a bigger fish later.
Are you using your contacts?
Once you have drawn up your list of people to contact – work through it systematically and methodically – and always follow up.
It is important to target your funders with care. Invest some time in doing background research 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 an art not a science. You can be lucky or unlucky, it’s usually not up to you but you do have to make sure that you contact enough funders. That way you can start managing your own luck by tapping into as many sources of funds as you can.
Have you got a clear summary?
It is essential to prepare a one-page summary of the opportunity. Too much information is not helpful. This document 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 sales document. It must be able to work on its own – and not require you to be standing there explaining it.
It needs to answer the following:
- What is the business?
- What is the market size?
- What is the opportunity within the market?
- Who are the management team?
- How much money is needed?
- What will the money be spent on?
- What is the vision for business that will be created post investment?
By answering all these questions, you increase the likelihood of being successful in raising the money you need for your business. Preparation, dedicating the necessary time, and perseverance are all key requirements of the funding raising process.
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. See: www.hymancapital.com