Forming a new business and developing it into a viable commercial entity is a challenge for its founders and investors, of whom some will be acquaintances or business angels and others interested parties, who have been convinced of the potential of the business idea.
If a business is to be commercially sustainable long-term, it will need further financing beyond the initial ''seed capital" funding and possible grant support stage. It will need working capital.
Sources of business finance for developing or expanding businesses are varied and include banks, business angels, crowd-funding schemes (for some), venture capital (VC) and private equity funders.
Irrespective of the funding route agreed by the directors, there are some Key Features for Success (KFS), which help guide the approach to be adopted with potential investors. This paper considers these KFS and is based on personal experience.
There are, however, three basic rules of engagement for consideration, as follows:-
Rule 1: Grants are for projects, not working capital! Whilst it may be reasonable to finance R&D with grants (e.g. Innovate UK) or through R&D Tax credits (via HMRC), such funds are not suitable for providing the working capital that a successful business requires.
Rule 2: Take care to carefully select prospective investors, based on their sector experience and the likelihood of them being empathetic and engaged partners. If opting for the VC or private equity routes, review the British Venture Capital (BVCA) handbook to aid selection. Shortlist viable investor prospects and avoid flooding the marketplace with requests for funding: this will get round and hints at desperation.
Rule 3: Put yourself in the mindset of the prospective investors. They have issues and priorities of their own to consider: their question is why should they invest in you, when they:-
have limited funds for investment and an oversupply of investee prospects.
What do investors invest in?
Investors fundamentally invest in a sound business proposition and people with expertise and experience. This is ultimately demonstrated in a Business Prospectus that contains the following 5 key elements:-
Overture: the initial outreach contact
This is the critical interaction and must be carefully planned: progression to any serious investor dialogue is predicated on an effective initial outreach.
NOTE *uninvited emails will usually go un-answered
A focused, well thought out and presented pitch is an essential precursor to developing a potential investor relationship, leading to a financing deal. In normal times this would be done via a face-to face meeting: in current times, this is likely to be via Teams or Zoom.
There are some sensible 'Rules of Engagement' which are critical to success, as follows:-
The Business Plan
This Business Plan is essentially a Prospectus for investment in a narrative format that provides the detail that underpins the 10 key elements listed above.
The document should be typically structured, as above and commence with a succinct 1-page Executive Summary that identifies the founders; defines the business proposition and opportunity; clarifies finance requirements; provides a guide to ROI and exit routes for investors.
Detailed financial forecasts and spreadsheets should be appended, with summary tables included in the main text. Diagrams and pictorials should be referenced in the main text and detailed in the Appendix. The main document should consist of 25-30 pages.
The typical timeline from an investor expression of interest to completion of a financing arrangement is 6 months. During that time due diligence will be undertaken by all interested parties and the relationship developed and secured.
It is important to include the estimated legal costs involved in the financial projections included in the Plan.
Discussions about equity, directorships and investor related topics should not be held at the early 'courting' stage and certainly not at the initial presentation phase: these issues have to be negotiated. Remember that both parties are looking for a WIN-WIN scenario.
Once the investment is in place it is important to remember Rule 4!
Rule 4: keep your investors informed on a regular basis regarding progress: good or bad. Generally, people like good news but need to be kept abreast of bad news, especially if the project is below milestones and the cash-burn is over plan.