“Any time is a good time to start a company“, so said renowned American angel investor Ron Conway. That may be true, but how easy is it to find the necessary funding?
The answer largely depends on your understanding of how fundraising should be done.
3 Common fundraising mistakes to avoid
Sadly, the dos and don’ts of fundraising are poorly understood by many business owners.
Firstly, there are three very common mistakes you must avoid when you are trying to raise finance for your business;
1. Do not base your fundraising strategies on other people’s success stories
It doesn’t matter if you read it in a book or heard it down the pub, a success story is like every other story: there will be embellishments and/or missing details.
But crucially, someone else’s route to glory isn’t always the path best suited to you, your team, or your product.
2. Do not treat fundraising as a part-time job
Regardless of the size and scale, fund raising should be treated as a full-time project. It is far too important to have anything but your full attention.
3. Do not think fundraising is a solo effort
Get your team involved. Investors like to see the people they will be backing, and that’s not just you.
With your team at the first meeting, a potential funder’s questions can be answered there and then. There’s no long-winded follow-up process that risks your potential investor losing interest, or investing their money with a more efficient operation.
Perseverance and planning are crucial
Steve Jobs once said, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.”
Wise words, but there’s another important P-word: planning
And the first thing you need to do when putting together your fundraising plan is to make a decision about debt.
1. Identify whether you need equity, debt, or both
Many people automatically start thinking about raising all the money they need as equity, failing to consider the consequences regarding dilution.
Opting to go this route can also result in poor decisions, such as raising the amount of money that doesn’t impact the entrepreneur’s shareholding, rather than raising the amount that is actually required.
Incredibly, the debt option is often forgotten. So long as there is the right management with the right track record, there are plenty of debt providers willing to assist early stage businesses (although this will not be the traditional banks).
Many business owners fail to fully appreciate that the debt route can be the superior option: in addition to not affecting equity, it can be a quicker and easier source of funds, which allows the business owner a speedier return to running a business.
However, a combination of debt and equity is often the ideal solution. This enables a cheaper cost of capital for the company: debt is entitled to interest rather than a dividend.
The balance of debt and equity is important, with 30% equity and 70% debt being a good ratio; this is a ratio that tax authorities and capital providers like to see.
This ratio also makes the company more likely to attract further equity investment, as potential shareholders can see that the management understands the advantages of debt being part of a company’s financing strategy.
With the equity/debt aspect of your plan in place, it’s time for spreadsheets.
2. Create a strong financial model
With your figures entered in a spreadsheet, or dedicated planning software, test them. Run a number of likely scenarios; these can be shown to potential equity investors and debt providers, demonstrating that you are prepared for different outcomes.
Remember, these must show the different types of returns from the different sources of capital. And you will need to produce a cashflow forecast for at least the next 12-18 months.
It is vital that your financial model is robust. Poor financial models kill funding requests. As do silly valuations.
3. Be realistic about your valuation
For a credible idea of the value of your company, compare the most recent valuations for transactions in your area.
Don’t be swayed by outlier valuations; look to the middle ground. Potential investors are familiar with the idea of something being too good to be true.
With all the information you will need pulled together, the next stage is to work on how that information will be presented.
4. Prepare a one-page summary of the opportunity
This is the correct format for initial contacts. If your proposition can’t be summarised in one page, you’re not ready to speak to potential investors, the majority of whom prefer a brief summary. If they’re interested, they’ll ask for more detail.
This one-page document should include:
- A summary of the opportunity
- The amount of investment being sought
- The kind of business going to be generated; and
- The potential return.
Be clear, be concise.
When a potential investor asks for more information, you need to compile a document that does this on its own. If it needs you to be in the room explaining it, it’s no good.
It needs to answer the following questions:
- What is the business?
- Who are the management team?
- What is the market size?
- What is the opportunity within the market?
- How much money is needed?
- What is the money going to be spent on?
- What kind of business will be created post investment?
Have this document ready before you send out the one-page summary; you don’t want to put off a potential investor by delaying sending the follow up document, or by that document being sub-standard because it was rushed.
5. Where do you look for the money?
Who you approach largely depends on the scale of your ambition. There are people who write £100 million cheques (although they’re not the easiest people to get in front of), and there are EIS/SEIS funds, VCT funds, and plenty of pools of EIS investors if your fundraising falls into the £1-5 million range.
If the funds you’re looking for are less than that, there are Angel Investors, although there is often an up-front fee for being introduced, so be sure the Angels are right for your sector.
It’s important not to discount your own connections, including family and friends. These can be the best investors and debt providers.
6. When contacting investors, preparation is key
Target your funders carefully. Background research will prevent you from wasting valuable time and energy chasing people who would never invest in your area, or your size of business, or your geographical location, or your target customers, etc.
These steps can’t guarantee you’ll raise the funds you need – fundraising can be more art than science – but preparation, putting in the necessary time, and perseverance all increase the likelihood of success.
As Twitter co-founder Jack Dorsey said, success is never accidental.
This guide has been written exclusively for ByteStart by Clive Hyman FCA, founder of Hyman Capital Services.