Raising capital is an essential step for many business owners focused on taking their businesses forward. Whether the decision to raise investment is driven by the business bursting at the seams and primed for scaling up, or if it is in need of an influx of capital to survive, careful business planning and preparation will ensure success in achieving the financial and business goals.
The process of raising can seem daunting with lots to consider and plenty of unknowns, which is why I take a 3 step approach to planning for investment, before heading out to talk to prospective investors, venture capital firms or financial institutions.
Step 1 – Business planning and review
Firstly, I recommend having clarity on why you need to go externally to bring funding into the business, rather than growing organically. Being clear on what the end goal from seeking investment is helps achieve this. Be that to:
- accelerate growth with a view to then sell the company
- scale up to then raise more capital
- fund an acquisition of a competitor
- enter a new market or fund a new product innovation
Any investor you approach will want to see evidence of the potential for future growth, which will give them a return on their investment. Based on your reason why, being able to demonstrate a solid 3 to 5 year business plan and detail of the current business performance is essential. I recommend:
- Completing a financial health check in preparation for disclosing the accounts, considering whether the business performance shows an attractive proposition right now for potential investors or if you need to wait
- Reviewing skills gaps in the current team and which functions need more support or expertise to deliver growth
- Identifying which parts of the business would benefit from investment to develop the technology capability and improve process efficiency via automation.
- Analysing how effective the current marketing is in driving leads into the sales pipeline, would more budget increase sales or be just wasted based on the current marketing approach?
For high value investments, it is likely that a virtual data room will be set up as part of the due diligence process. This is where you will supply evidence such as a business plan, financial accounts, marketing strategy, employment contracts & policies, Technical briefs for system & IP records etc. Which is why it is good to have all this documentation in order, to help speed up the process.
I know from personal experience, taking time to be well prepared will help you and your team feel more confident that you have all the material information at your fingertips, which in turn will give investors and lenders more faith in your business.
Step 2 – Determine which route for raising investment is right for you and the business
With a solid business plan in place and having completed a business review, it will be much clear how much money needs raising and where it will be invested in the business. Having these insights will also help to inform the best route for raising capital, for both the business and its directors.
The right source of investment is likely to come down to the current financial health of the business, whether the directors are comfortable to give away equity and a degree of control in the business, or whether is it a mix of cash and experience that is being sought from an investor and what additional skills/network are required for the business.
Some further questions to consider at this stage are:
- Will there need to be further rounds of funding, to deliver the mid to long terms business plan?
- Is the timing right to raise now or can you self fund further, to secure a higher valuation and better investment terms later?
- Can you reduce costs / drive greater efficiency of the current operation to free up cash and reduce the amount to be raised?
Getting the right source of investment will be critical to the future potential of the business, so it is worth investing time at this stage to talk to others about their experiences of fund raising, watching pitches on some of the crowdfunding sites, seek out advice from financial / legal professionals and talk to a variety of investors to find the right fit and terms.
As there are a number of routes to consider either from equity or debt funding, at this stage I always recommend getting advice from a qualified Financial Accountant and Commercial Lawyer, particularly when it comes to setting a realistic valuation for the business, knowing what are acceptable investment terms, forecasting the cost of funding (i.e Interest payments/ Equity stakes) and benefiting from any tax relief applicable for each option available.
Step 3 – Set out a 90 day plan to optimise the investment funds
Having completed a successful round of investment, it is definitely time to celebrate! Then it is time to quickly get stuck into deploying the funds into the business and delivering on the growth plan.
My recommendation is don’t wait until this point to work out how to spend the cash. Set out a detailed 90 day plan with measurable targets and timeframes, to ensure you maximise the benefit of getting the investment from the day the cash hits the bank, for example:
- Engage a recruitment agency and have an interview plan in place, with a clear person spec, details of the complementary skillset needed to enhance the current team and be clear on the salary range you have budgeted.
- Scope the requirements of any new technology, shortlist suppliers or developers and map out a project delivery plan, so that the benefit can be realised quickly.
- If the investment is funding an increase in the marketing budget, update the activity plan with new campaigns or activity and set out clear targets /KPI’s to measure the ROI of the new activity.
- Set out and brief the team on new sales targets based on the pace of growth required to hit the financial targets.
These are just some examples of how to plan ahead of seeking investment and it may seem like a lot of preparation before even getting any funding, but you don’t want to be in a position where you have under-raised, selected the wrong partner, paying interest on a loan not being used or having to report to shareholders about their investment 6mth down the line with no tangible results.
If you are considering an investment round and I can be of assistance working through these 3 steps with you and your team, please do get in touch. I also share more tips about planning for funding in a recent Sussex Collaborative Business Bitesize episode:
I am not a qualified accountant or lawyer, but as a member of The Sussex Collaborative, I can also make an introduction to the team at Cognitive Law for any Legal advice and Karen at The FD Centre for Financial advice required as part of an investment round.