Why might a business need to get investors on board? Well, investment is the lifeblood of a growing business. A lot, if not the majority, of businesses source investment funds internally from own their working capital. This is generally a longer-term strategy, which established businesses have the luxury of employing. They are more likely to have a spare £100,000 in their bank account, which can be better used in purchasing updated plant and machinery.
However, start-ups or younger businesses with ambitious growth plans, can’t necessarily wait for that cash to organically filter into the business, they need it more immediately. That is when external investment comes into the equation.
This can take many forms, from angel investment to injections of funding from Private Equity Firms or Venture Capitalists, all of which have their pros and cons. Angel investors, Private Equity Firms & Venture Capitalists are looking to invest in an idea, which has potential. They contribute the finances to help a business, either to finalise their offering or scale them up to reach a wider customer base. The idea being they can recoup their investment in the subsequent growth that their capital injection provided.
So, how do you attract these sorts of individuals and organisations to your business? What are they looking for when determining whether you are a sound investment? Here are a few tips:
1. Have a plan
A business plan isn’t just something you should have; it is something you need to have. An investor wants to know that you have a clear vision of what the future business will look like, as well as a road map for how to get there. This does not need to be a thousand-page document, which dissects every possible scenario. Instead, it needs to establish that you are aware of the opportunities and risks facing your business, have ranked them, and have some steps to capitalising on or mitigate against them.
We tend to do this exercise with all of our coaching clients on a single piece of paper, called a One Page Plan.
2. Have a grasp of your numbers
This is important for two reasons. Firstly, any investor is going to want to have comfort that your financial data is accurate, so your accounts and management information will need to be beyond suspicion. Good and accurate financial information will provide them will comfort that “the numbers do not lie”, both when making the initial investment decision, but also future decisions should you need to go back for more.
Secondly, they will also want reassurances that you know how to be profitable in your industry. This means you need to know stuff like, your profit margins, your sales projections, your working capital cycle, expected Return on Capital Investment (ROCI) of their injection etc. If you have any projections, they are going to ask what assumptions you have made to reach these figures and why you used them. If they suspect that you don’t know your figures or your industry inside out, they are going to doubt your ability to lead the business with their cash.
3. Develop your systems and processes
There are many yardsticks that can measure the success of a business, one of those is how well it can run without you? This is where a lot of SMEs fall down when their owners come to sell their business. In the selling process it becomes clear that they are essential to the success of the business, as they maintain the customer relationships, it is their networks were the leads come from, it is their advice that attracts the big fees etc. As a result, when you remove them from the business, it has no real value.
It is the same when seeking external investment, investors want to see that your business is strong enough to stand on its own two feet. This is why it is important to develop your systems and processes. Investors will be reassured if these are in place as it is a clear indication that you have done your research and are competent in implementing ideas. Secondly, implementing good controls and systems indicates you are planning for the long term, which is an important signal to give off when you are after significant cash injections.
4. Develop your network
Just like succession planning, if you are looking for investment when you need it, it’s generally too late. Hence why it is important to build your network within these investment decision spheres. Unfortunately, not everyone’s father-in-law or next-door neighbour is a multi-millionaire and even if they were, they may not have the appetite to invest in your idea. Fortunately, the North East has a great network of private equity organisations, such as Mercia and North Star Ventures as well as a host of successful individuals looking to be investors in new business projects. Connections can be gleamed from LinkedIn and followed up at various networking events and seminars where these relevant people congregate.
By having these contacts at the outset, you can decide who to approach first based on your needs at the time. This can be a long-term relationship, so compatibility is more important than you think.
For more support on how to attract investment into your business please speak to me Jack Spoor via telephone 0191 2818191 or via email: email@example.com or visit our Business Accelerator page.