As a public company, some of the most important conversations you’ll have are with institutional investors who know little or nothing about you. If you’re lucky you’ll get around 20 minutes to persuade a complete stranger to part with the equivalent of a small lottery win, writes Philip Dumas, joint head of corporate broking at City broker Dowgate Capital.
Most entrepreneurs can talk about their products and markets at great length and with enthusiasm, but few have the skills or experience to sell that dream succinctly and effectively to a cynical fund manager with an eye for a bargain.
Your broker will have undertaken this exercise literally hundreds of times and it’s his job to ensure you meet the right investors and that you are suitably prepared for each meeting. It is not uncommon for ‘roadshows’ to include 50 or 60 investing institutions over a two-week period and many of them will differ from each other as chalk to cheese.
Clearly it is important to choose the audience carefully. There’s no point taking a pharmaceutical company to see someone who runs an oil and gas portfolio. Happily, most institutional small-cap investors are generalists and have a wide knowledge of different sectors.
From the outset, it’s important to understand what institutional investors are looking for. They invest millions of pounds on behalf of thousands of individuals and if their focus is on small-cap growth companies they willingly accept higher levels of risk in the hope of richer rewards. So they need to see that the business proposition is sensible, the model is workable and there is ample opportunity for above-average growth.
More than anything, they want to be convinced that the day-to-day management of the company is in the hands of a dedicated and professional team who are prepared to put a substantial amount of their own money at risk. So how do you get this message across in the short time allotted?
Preparation is vital. A good broker will ensure that you have rigorously practised and honed your presentation until it is word perfect. You only get one chance to make an impression: fund managers often meet up to ten companies a day.
Here are my tips for a successful presentation.
The presentation document
- Never do a Powerpoint presentation: you waste precious time while someone from IT sets it up.
- Always use a hard copy and keep it brief, preferably fewer than 20 pages.
- Number the pages. There’s nothing more frustrating for a fund manager than asking you to comment on a page in the presentation he can’t identify.
- Include pictures: a graphic representation of a plant, office, process or product speaks a thousand words.
- Make sure the document is ink-absorbent. It is usually the fund manager’s only record of the meeting and he will want to scribble notes on every page.
See also: 4 things to avoid when pitching for investment – Barnaby Lashbrooke, founder of virtual assistant platform Time Etc and start-up investor, explains.
Every company is different, but most presentations follow a tried and tested formula. The following template can be applied in most cases. Bullet points are usually sufficient and you can elaborate should the fund manager need more detail.
- Who am I? (John Smith, CEO)
- Who are we? (J Smith Widgets Ltd)
- Who owns us? (current principal shareholders)
- What do we do? (manufacture high-quality widgets in Doncaster)
- How do we do it? (outline of manufacturing process)
- How much do we make? (financials)
- Where are we going? (future plans)
- What do we need to get there? (£5 million for an acquisition)
Don’t be greedy. Your most important task is to address the quality of your shareholder register from day one. If you have to compromise on valuation to ensure the participation of certain institutions it’s generally worth it, and they are usually in it for the long term. Remember, a successful fundraising is a very public endorsement of your company and a list of blue-chip shareholders underlines the quality of your business to potential customers and competitors alike.
Most importantly, keep your promises. You will probably want to go back to your investors again.
Hitting the right pitch
There you stand, a brilliant business idea in mind and in front of you a room full of institutional investors with the cash to help you realise your ambitions. All you have to do is deliver the perfect sales pitch. But presenting to private investor networks is far from easy.
The pressure of this make-or-break pitch is obviously one problem, yet there are other difficulties too. The process is tricky and often lengthy. Moreover, as with all forms of private equity funding, raising money through investment networks will not suit everyone, not least because the entrepreneur treading this path has to realise that they will no longer have complete control of their business.
‘You have to remember this is a minority sport,’ says Anthony Clarke, managing director of the London Business Angels network (LBA) and chairman of industry regulator the British Business Angels Association (BBAA). ‘Yet it’s also necessary for those able to grow quickly and who don’t have the assets on which to secure bank debt.’
For those willing to accept these caveats, a private investor network has one significant advantage over other forms of funding. ‘Networks are a great way of getting in front of a group of potential investors,’ says Stephen Pegg, spokesman for Lloyds TSB Commercial Finance. ‘For entrepreneurs it is always a real challenge to find possible backers.’ Exposure to many at once should therefore not be passed over lightly.
Investigate your options
In practice, there are two main types of investor network. The first (typified by recent BBC2 show Dragon’s Den) usually consists of a not-for-profit organisation operating an investment club for private individuals. These operations, such as the LBA and the Great Eastern Investment Forum (GEIF), tend to have a regional focus and work by bringing their member investors together with local entrepreneurs in need of funding. Those managing the network will sieve through business plans and select a certain number of companies, perhaps ten a month, to then pitch to would-be backers. Having delivered a ten-minute presentation, these investors will have a chance to grill those seeking finance.
By way of contrast, the members of other networks, such as Braveheart Ventures, Hotbed and Pi Capital, are more passive in their approach. In these cases, the managing organisation acts more like a venture capitalist than an investment club. ‘We receive business plans, select certain businesses from this list and then send the details of these firms to our clients,’ says Geoffrey Thomson, Braveheart’s chief executive. Unlike the more traditional networks, which simply facilitate a meeting between entrepreneur and investor and allow the two to then consummate any deals, the likes of Braveheart assume a greater burden. They will, for instance, reject a far greater number of business plans, carry out risk assessments and even strive to balance the portfolios of their member investors.
One company to have been through this latter process is visual display technology developer MicroEmissive Displays, which went on to float on AIM in November 2004. Prior to that, the company secured funding from a series of backers, including Braveheart and venture capital behemoth 3i.
Finance director Alan Bennie has nothing but positive remarks to offer with regard to the experience. ‘You get the best of both worlds,’ he explains. ‘From one point of view you are dealing with a single entity and yet you can also speak to your individual investors too.’ Also, this structure seems to afford ongoing benefits. ‘All our investors stayed on at flotation,’ Bennie continues. ‘In fact, all of our investors invested again and it’s given us an interesting shareholder base. We have institutions but we also have a lot of private individuals too, which will become increasingly important as we develop on AIM.’
Know your place
When dealing with either type of organisation, the key point to remember is that private investor networks, as their name suggests, favour those looking to invest and not those seeking investment. Regardless of the network you opt for, you have to understand that they will spend far more time vetting the businesses seeking cash than they do wannabe investors. To this end, should you receive an offer of financial backing through such an organisation, you must carry out all the appropriate checks and balances yourself and it is essential to have your own adviser (usually an accountant) on hand to ensure the deal is structured appropriately. It is also important to understand an investor’s motivation.
Few, if indeed any, will be driven by anything as noble as altruism. Instead, as Braveheart’s Geoffrey Thomson reasons, many ‘want real high-risk, high-growth opportunities.’ Anthony Clarke of LBA adds: ‘I think that most angels are going for businesses that are scaleable but very innovative. Investors go for high-risk, exciting ventures as the rewards are potentially far higher and so are the exit opportunities.’
Stacking the deck
The upshot is that, as with any form of equity fundraising, the odds are against you being successful. Venture capitalists and private equity houses may be even more discerning, yet for every firm that successfully raises money through a private investor network, many more fall by the wayside. LBA is fairly typical. ‘Of the 500-odd business opportunities we see a year only about ten per cent get to present,’ says managing director Anthony Clarke, ‘and historically only about 30 per cent of those presenting are then successful.’
Faced with such a low strike rate, it is important to do all you can to stack the deck in your favour. ‘If you’re going to approach a network, make sure you are doing it at the right time,’ Clarke says. ‘Don’t show us an executive summary if you don’t have a business plan or the management accounts to back it up.’
Professionalism is all-important, says Hugh Parnell from GEIF. ‘On Dragon’s Den I was amazed at how badly prepared some of those entrepreneurs were. You need to focus on what your business is, how you’re going to make money and who you’ll have to recruit to achieve it. In essence you need to ensure you are investment-ready.’
Most of all, reckons Parnell, it is essential to be realistic. ‘We came across one company which was looking to raise £500,000 some time ago and yet £250,000 of this had been earmarked to pay the salaries of the two lead executives. That’s simply not going to wash with serious investors.’
Professionalism and preparation can help entrepreneurs open the door yet, regardless of the type of network you choose to approach, it is presenting skills that decide whether or not they have what it takes to saunter through. ‘You have to be very careful when pitching,’ counsels Jim Murray Smith, chief executive of AIM-listed materials coating firm Hardide, which raised cash from the Oxford Investment Opportunity Network (OION), prior to flotation. ‘You need to prepare yourself really well and don’t over-emphasise your product. Investors have to know that the technology or product works, of course, but what they are really interested in is the investment proposition and the potential returns. When you are likely to be profitable, for example.’
Syndication on the rise
For firms who pitch well, private investor networks are increasingly able to offer one other significant advantage over individual angel investors, namely, access to syndication. Many entrepreneurs still continue to meet angel investors through personal contacts or events such as those organised by LBA, GEIF and OION. Nonetheless, with entrepreneurs seeking increasingly large amounts of cash (£500,000 is now reckoned to be the average) investment networks increasingly urge their members to syndicate. Braveheart’s Geoffrey Thomson says that a typical investment of £300,000 arranged through his network could involve around 30 individuals.
This has benefits for both parties. Investors can spread their cash across a wider pool of investments. For entrepreneurs, meanwhile, the risks of being burdened with a backer who overly interferes with the running of the business are reduced. Those investing in your business will, of course, take an interest in how things progress and some will bring useful skills and contacts to the table as well. But through syndicates usually only the most able investors are asked to fill this role on behalf of their peers.
The point is best summed up by Thomson. ‘There are 86 high-net worth individuals on our books. Twenty to thirty of these fit the bill [of being useful board additions] and are keen to do it, a similar number would want to do it but wouldn’t be successful, and some just have no interest in that side of it.’