When a growing company first seeks significant outside investment it can be a big challenge for the owner. They’ve got to pitch it just right, selling the company’s strengths at the same time as giving an honest representation, while also making a strong case for growth potential and financial viability. Without previous experience of speaking to investors, business owners can easily trip up. Here are some of the most important do’s and don’ts when approaching banks, private investors and venture capitalists for funding.
The overriding message from investors and advisers is, make sure you’re fully prepared. You need to show you have a comprehensive understanding of all the financial details of your company and have a clear and carefully considered strategy for the business. Without exception, investors will want to be convinced that you have everything under control and sufficiently planned.
A weak or bad business plan can scupper a fundraising altogether, which is why Charles Whelan of corporate finance boutique HW Corporate Finance argues that companies need to employ advisers. ‘They will have written hundreds of business plans and can ensure chief executives are well prepared for pitching to investors,’ he says.
‘Practise your presentation,’ says David Porter of financial adviser Best Invest. ‘Don’t read from a script. Memorise the presentation and be flexible enough to field questions when required. Also, try to make sure any demonstration of the product actually works. Things do sometimes go wrong in demonstrations but the risks can be minimised with preparation.’
Be concise in your answers to questions, he adds. ‘Even if you aren’t trying to avoid the question, you’ll alienate investors if you waffle on for ages before giving the answer.’ It’s also important that you make yourself available for follow-up telephone calls. There’s nothing more frustrating for investors than if they phone you to ask supplementary questions but can’t get hold of you.
Provide good financial information
Make sure your accounts and financial results are up to date. Richard Lee, corporate development director of stockbroker WH Ireland, says that poor or non-existent management accounts are guaranteed to put off investors. ‘Financial reports should include proper comparisons to last year and to budget.’
Another classic mistake companies make when pitching to investors is that the figures in the presentation don’t match up with figures in the accounts or other literature from the company. But if they legitimately don’t match because of recent changes, explain the reasons and the adjustments made.
Be realistic about value
It’s common for business owners to believe their company is worth more than investors think it is. The danger is that if you have an inflated view of your company’s value, it could deter potential investors before they have even looked at the business properly. And if you then cut the valuation significantly this could further worry them.
On the other hand, undervaluing your company could limit the amount you raise. This is particularly true when floating on the stock market and issuing shares. Whelan warns, ‘It’s not a good idea to approach potential shareholders with a set percentage of the company you want to give away in return for their cash. It’s better to make clear how much you want to raise and then negotiate with the investors about the final percentage they will own.’ That way, you’re more likely to negotiate a good deal on the equity you distribute at the same time as securing the funds you require.
According to Charles Whelan, it’s standard practice to discount forecasts or projections, so that targets are more easily achieved or exceeded. ‘Don’t come up with outrageous forecasts but don’t be too conservative either because investors will tend to assume that they won’t be hit and drop their expectations even further.’ Whelan says that on a scale of one to ten, with five as average and ten as wildly optimistic, a company should pitch their forecasts at around seven out of ten to allow for investors’ scepticism.
If investors are too sceptical about your ability to deliver what you say you can they will be put off. Mike Fletcher, director of Corporate Finance at investment bank Altium, believes that management teams with overambitious plans will be found out and their credibility will suffer. Anyone putting money into a business will assess the robustness of the assumptions in the business plan, so be realistic about the risks that could stop you achieving your goals.
Be honest about your past and track record
‘Get your dirty laundry out in the open nice and early,’ advises Whelan. ‘If a company chief is honest about their past at the start, most investors will be impressed by this openness and prefer it to discovering details at a later date. Anyone that finds fault with your past will not be suitable investors anyway, so no harm will be done.’
Find the correct backer
Make sure that you are approaching the right investor. It’s no good approaching a venture capitalist for a £10 million investment when they never invest more than £2 million in a single company. And bear in mind many are sector specialists, so don’t try to raise money from a technology fund when you run a food business. Some venture capitalists invest at an early stage while others may not invest until the company is profitable. Make sure you target the right venture capitalist for your stage of development.
Robert James of venture capital group Prelude Ventures, which runs the specialist technology and life sciences investment trust Prelude Trust, says, ‘We often get service businesses approaching us that used technology in their operations, but they’re not the kind of leading edge technology businesses we look for.’
Prelude Ventures, for example, gets 800 business plans a year and has four managers to assess them. You will find that most venture capitalists will automatically reject any submissions that aren’t immediately clear on the business’ plans, or that are in the wrong sector.
Show off your management team
The chief executive is the linchpin of any business, but, says Lee, prospective investors also like to be reassured that the company has a strong and diverse management structure in place. ‘They are investing in the management team rather than one person and like to see a spread of talents.’
Andy Stoneman, managing partner of Menzies Corporate Restructuring, agrees, adding, ‘If the chief executive is sales-driven, for instance, then it’s important to have a finance director keen on detail to provide some balance.’
And remember, if you take your colleagues to an investor presentation, don’t do all the talking yourself. Sharing the presenting role between you is an obvious way to demonstrate that management work well together as a team.
Don’t overcomplicate your presentation
Many chief executives make the mistake of trying to put too much information on each slide of their presentation and have too many slides. Investors won’t concentrate if the presentation is too long – around 20 to 30 minutes is more than enough to explain most businesses. Potential backers can then quiz you on any extra points. Whelan believes that a good idea can be explained on one sheet of paper. ‘If investors want to know more they will ask,’ he says.
Don’t overfill your diary
It’s flattering if dozens of investors are interested in your business, but trying to squeeze in too many in one day and not allowing for travel time between meetings can spell disaster. When you’re on a tight schedule it’s easy to run behind and arrive late to meetings, which doesn’t make a good impression. And you will alienate people if you try to catch up when behind schedule by cutting a meeting down to 25 minutes, rushing through the presentation and leaving before the investor has posed all the questions they want to ask.
Project a positive corporate image
Your corporate image includes the company’s website, premises and management team. When a potential investor has agreed to see you, the first thing they are likely to do is look at your company’s website. If it is out of date or uninformative, you’ve missed a golden opportunity to impress.
Financiers may also visit your premises as part of the decision-making process. If your offices or factory are a mess or poorly maintained, they may question how professional is your operation. Having said that, even successful companies don’t always have impressive premises. Just ask the fund managers who visited cake-maker Inter Link Foods prior to its AIM flotation – at least one was unimpressed by the state of one of its factories, but that hasn’t stopped Inter Link being one of the most successful companies in the market.
Be warned that the health of a company’s chief executive might also come under the spotlight in the funding process. David Porter of Best Invest remembers one chief executive who was forced to walk up three flights of stairs to meet investors because the lift was broken. He looked so worn out when he arrived, Porter immediately began to have doubts about investing in the company and worried about what would happen if the chief executive did fall ill. Putting these kinds of doubts in the mind of an investor is not a good idea.
Don’t neglect your company
Raising money is a time-consuming process, but chief executives would do well to remember that running the business should take priority. ‘Management teams often take their eye off the ball in relation to sales during the fundraising process, which can have a serious affect on a company’s trading position,’ according to Fletcher.
This phenomenon is the reason why some companies that float on the stock market issue a profit warning just a few months after joining the market. For example, six months after drinks vending machines developer In Cup Plus raised its cash, it ended up relaying the news to investors that sales were disappointing because it had taken longer than expected to build up its sales force. The time and effort required to float and raise funds detracted from recruiting sales staff.
When mid-sized companies like In Cup Plus raise funds, either by going public or through private investment, it’s common for management time to be taken up significantly, which in turn reduces the time spent on growing the business. Without due care and attention, the very enterprise you are raising cash to develop can be adversely affected, perhaps even irrevocably. Jeopardising the success of your business by undertaking fundraising is a bad idea in anyone’s book.
Venture capitalists’ top five pet hates
Bluff and pretence ‘I hate it when someone starts to use technical language, but it’s clear that they don’t understand what they’re talking about.’
Crazy claims ‘When someone comes into a meeting and insists their business can cure cancer or AIDS, we immediately think they’re a crackpot.’
Poor presentation ‘One person had so much information on a single slide of their presentation that the font was tiny and it was illegible.’
Ridiculous valuations ‘In the dotcom era, there were people wanting funding who hadn’t even set up a company yet but were claiming pre-money valuations of £50 million without any justification.’
Unworkable ideas ‘We once had a man approach us for investment who said that to capitalise on the two booming industries of gambling and pornography, he wanted funding to build a track where naked women could race.’
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