Have you ever wondered what you need to prepare in order to give yourself the best chance of raising funding for your business? In this article, we will outline the 9 key things that every entrepreneur should prepare, to give you the best chance of successfully getting investment into your business.
Entrepreneurs often think that when looking for funding the first thing that you need to do is to get in front of funders. Whilst meeting potential funders is of course an important step, many entrepreneurs rush into these meetings without being properly prepared. Often, they fail to explain their business effectively, and cover the points that funders want to know about. The result of which is that they don’t get the response that they are looking for.
It’s important to remember that you often only get one shot when speaking to a potential funder, and if you don’t make a good first impression, it’s infinitely harder to get a second bite of the cherry.
So, in order to help entrepreneurs be better prepared to stand in front of funders with confidence, we at InvestorConnected have developed the Funding Readiness Pyramid. This pyramid describes the 8 steps that you need to prepare BEFORE you go and approach funders, and some of the things you need to consider when approaching them (the 9th step).
Below we will briefly describe each step, and show how they can help you improve your chances of success when looking for funding.
- Business Planning
Business plans have been around for a long time, and many entrepreneurs think that creating a business plan is something old fashioned. Instead the first thing they often do is to create a pitch deck / presentation. Whilst starting with your pitch deck is one approach, going through the discipline of writing things down has a number of advantages.
Firstly, it allows you to focus on the fundamentals of your businesses proposition. Writing things down helps you to clarify your thoughts and convey your message in a much better way. You can read back over what you’ve written and get other people to comment on how you have communicated your message.
When you create a pitch deck, people often get distracted with the graphical presentation, and delivery, and more often than you would think, the core message can get confused or lost, as intuitively your mind fills in the gaps which may not be obvious to someone who has never heard about your business before.
We at InvestorConnected have worked with lots of entrepreneurs that are charismatic and great presenters, and they manage to impress people with the passion they show for their business, but when put in front of investors, who are paid to analyse and pick holes in people’s businesses, they often crumble as they don’t have the answers to the questions that those investors want to know.
Putting together a comprehensive set of financials is essential when looking for funding. You need to be able to describe your business in numerical terms. Whether it is how many customers you have now or plan to acquire; how much revenue you are earning or plan to earn; or the unit costs of your operation; a funder will want to see your business through a financial lens.
Now, many of you will roll your eyes and switch off, as you think that numbers are boring. However, you need to keep in mind that as far as funders go, numbers are not just interesting, they are downright sexy!
Investors and lenders love numbers because ultimately (behind the veneer of how much they value people and love being part of something new and exciting) numbers is how they will measure the success of your business.
So sharpen up your Excel skills and start working on those spreadsheets.
When looking for funding, it is essential that you get the legal side of your business in a position that makes it suitable or attractive for investment. That means that the structure and the governance of your company should be such that it doesn’t provide too many obstacles for anyone that is looking to provide funding.
If you are raising equity, you need to ensure that your corporate constitution, such as your articles of association are drafted well; that your share structure is clear and not too complex; that you have shareholders agreements in place to cover issues relating to the relationships of shareholders with each other and the company. That you have all your shares correctly issued and that your governmental or regulatory documentation is all filed correctly.
If you are raising funding through a loan, lenders in addition to the things listed above, may also want to look at details of any collateral that you have etc.
You’ll need to have this thoroughly organised, as the legal framework of your business will outline the benefits, liabilities and protections that funders will have. So, if you don’t want to be in a position, where a funder likes your business, but your legal situation is either too complex or hostile to their interests, then it’s advisable to review your legal situation and possibly consult a professional corporate lawyer and or accountant, to ensure that these things don’t scupper a deal.
- Valuation & Analysis
When you are looking for equity funding, analysing your financials and putting together a valuation this is essential, as how much your business is valued at today, will determine how much of a share of your business you will have to give away in exchange for the investment you are looking for.
If you value your business too high, investors may think that you are unrealistic and could even question your business acumen. But if you value your business too low, you may give away more of your business than you need to.
You should take some time to value your business properly, and not just stick your finger in the air and guess. Remember, for investors, valuations are important as the price they pay today, has a huge impact on the return that they will make in the future. So spend some effort to get it right!
- Tax Incentives
They say that the only two things that are certain in life are death and taxes. Which is why making sure that you take advantage of any tax incentives which benefit funders is key. Those people that invest money in businesses tend to have a decent amount of money to begin with, which means that they have a natural desire to preserve their wealth. Therefore, if you can take advantage of local tax incentives, you will make your business even more attractive to those investors.
For example, in the UK as of 2020 we have both the Seed Enterprise Investment Scheme (SEIS) for very early stage businesses and the Enterprise Investment Scheme (EIS) for slightly more established businesses. If a company is registered with the tax authorities, they can provide investors in those businesses with a tax rebate of 50% for SEIS investments and 30% for EIS investments.
That tax rebate can off-set an investor’s overall tax liability and therefore dramatically reduces the downside risk when investing in your business. Ensuring that you take maximum advantage of these types of schemes can be hugely beneficial.
- Marketing & PR
Now more than ever, visibility is key. Every investor or lender will check out your online presence, your social media, whether you have been seen in the press, as they will want to know what you are about and how you communicate with your client base. They will also want to see if there is any negative publicity which may raise some red flags.
Marketing and PR are especially important if you are looking to do a more public fund raise such as through a crowdfunding platform. So spending some time and money on ensuring you have a good marketing presence can be hugely beneficial throughout your funding round. And, if you are not great at marketing and PR, there are lots of professional advisors and agencies than you can hire to help you out.
- Pitch Deck
As stated above it’s now very common when people are preparing for fundraising to start with their pitch deck, but from our experience doing so is often a mistake. Your pitch deck should communicate clearly what your business’ does, how it relates to customers and competitors and most importantly how it can make money for potential funders.
If you have gone through the previous steps described above, then you are often much clearer about the key points that you want to get across in your pitch deck. Remember, that pitch decks are graphical representations of your investment proposition. In general, pitch decks are meant to be presented and not sent, so you are limited with how much information you can show. So clarity and brevity are your friends here.
The best pitch decks are the ones that really clearly show the fundamentals of your business and answer the key questions that a funder would need know when making a decision to invest.
- Funding Video
More and more we are seeing the impact of video in helping deliver informational content to people. Creating funder focused videos can help people to be more engaged with your business’ investment proposition. You can also show a lot more in a video in a shorter time than you can do in a traditional presentation.
Whilst this is not a necessity in most formats of fundraising, it certainly is if you are trying to raise funds using a crowdfunding platform. Pretty much all of them require you to have a video. So making sure that you create one that is not describing your product, but rather describing your business as an investment proposition, is important.
Remember your audience, who are investors, and what THEY want to see … a return on their investment. Showing the bells and whistles of all the features of your products is not going to give funders the information that they need. Your video needs to answer the key investment questions that investors have. After all, what you really want is to get face-to-face with them so you can discuss your business in more detail and convince them to invest.
Last but not least, you need to get access to potential funders. The first thing to do here is to look at your own network to see if your friends, family and their circle of friends and family might be interested in investing. Having a “warm” introduction is always useful.
You can also attend specific pitching and networking events to try and access those people that are outside of your immediate network. Then of course there is a good old cyberstalking method, using social networks like LinkedIn, Facebook or Angel.co to target investors you think may be interested in your business. You can also use platforms such as InvestorConnected, and many others to find investors and apply to them directly.
The more creative you are when approaching an investor, sometimes the better, as you need to stand out from the crowd. That doesn’t mean finding out where they live, show up at their house and trying to deliver your pitch through their letter box – as that is likely to get you arrested.
Just think of creative ways to get their attention in a non-invasive way.
One of the biggest mistakes we see entrepreneurs making, is tackling funders before they are ready. This is the last step in the process for a very good reason. As stated at the beginning of this article, you generally only get one shot with a potential funder, and it is extremely rare to get a second bite of the cherry, so making sure that you are prepared is essential.
Not being prepared or clear, usually doesn’t end well! But, if you have gone through all the previous steps in a comprehensive and thoughtful way, you should be able to handle anything that an investor throws at you, and hopefully get that investment that you want.
Remember it’s a funder’s job to make your life hard. To ask difficult questions, to probe and prod your business’ strategy. As if they invest, they will be taking a risk and they need to feel comfortable that you know what you’re doing.
There are NO SHORTCUTS when preparing for funding. You need to do your homework, clearly define your business strategy in written, graphical and financial terms and that’s what will make you prepared when it comes to staring funders in eyes.
Thierry Clarke is the founder and CEO of InvestorConnected, a platform that helps businesses get funding ready.