A guide to securing investment for your business

Introduction

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.

• have to be seen to make wise investment decisions and justify these.
• are accountable to their stakeholders for optimising ROI and exit routes.
• are looking for WIN:WIN deals: what sets your proposition apart from the other runners in the field?

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:-

• A realistic 3-Year-plus Business Plan, offering a differentiated and competitive product/service that has good market drivers and serves global markets
• Innovators and management with relevant expertise and experience
• An IP portfolio that offers commercial licensing opportunities
• A substantial ROI opportunity in line with investor company guidelines
• A clear understanding of the exit route and timeline

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.

• Do detailed background 'homework' on the prospective investor:
• Who are they and what levels/types of investment are typical?
• Make an initial call to informally identify key contacts and decision-makers. (company receptionists can be very helpful here, if handled well!)
• Look at their existing Portfolio (anyone you know?)
• What is their Fund Value and resources available for investment?
• Prepare and practice a 5 minute 'Elevator Pitch'. This must be based on an already established Business Plan.
• Call and ask to speak with an identified person for 5 minutes*or get a date/time agreed for the call
• Investors are curious about opportunity, they don't want competitors to get advantage and will normally give you 5 minutes of their time, SO MAKE IT COUNT!
• Deliver the Elevator Pitch and include 'hooks' to get attention and tantalize!
• Ask for an opportunity to do a full pitch (1 hour).
• Post-conversation, email a ONE PAGE summary of the Prospectus as a teaser before the Full Pitch session.
• Agree a date for the Full Pitch and find out who the participants will be.

NOTE *uninvited emails will usually go un-answered

The Pitch

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:-

• Identify all participants and confirm time allocation.
• Use a well-constructed slide deck and limit this to 24-or so slides for the pitch.
• Practice the pitch and deliver with confidence and without hesitation.
• Base the pitch on the Business Plan and avoid jargon and too much techie' stuff.
• Keep to time and answer questions succinctly, preferable at pitch-end.
• Focus the pitch on 10 key elements:-
• Who you are as a team and how your backgrounds are relevant.
• Summarize the technology and IP and the commercial doors they open.
• Provide a market overview: size, structure, value, drivers, competitors.
• Identify your business proposition and how offers a differentiated opportunity.
• Clarify progress YTD and next steps.
• Identify the manufacturing/supply route.
• Specify the route to market and geographical roll-out.
• Summarise the 3-year financial plan: focus on cash, P&L, beak-even projection.
• Identify finance required: based on worst cashflow point plus 15% headspace.
• Demonstrate the investment opportunity, ROI and investor exit strategy.
• Summarise and agree next steps.
• Forward the Business Plan when a Non-Disclosure Agreement (NDA) is in force.

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.

Outcomes

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.