#1 – Create a business plan
A business plan is the most basic requirement for any firm looking to go beyond the one-man or woman band and grow considerably. This is often the first thing that prospective investors will look at and the first hurdle to overcome. A plan which clearly sets out clearly the path to profitability or growth alongside the past performance will be an instant tick in an investor’s mind.
A good business plan does not need to be complicated or even hugely original, but it should be thorough, identifying future risks as well as opportunities. It should also make it clear to anyone reading it what the goals of the business are and the market in which it is looking to compete – even if that market does not yet exist.
#2 – Build a strong management team
For businesses that approach IW Capital for funding the first thing myself and our investment directors look for is a strong management team. This comes in many forms but ultimately boils down to general business experience and relevant sectoral experience.
One of the marks of a good founder or CEO is the ability to recognise their own weaknesses or shortcomings. No one is an expert in every facet of business so surrounding yourself with talented people is a necessity – whether that be a top-notch CFO or someone that just gets digital marketing, each team will be as unique as the business.
If the coronavirus pandemic has taught businesses and investors anything, it’s that strong management and the ability to adapt quickly in the face of adversity is absolutely key to enduring success.
#3 – Decide the level of funding your business needs
By this point you’ve got the building blocks of your business mapped out, so now it is time to figure out how much funding your business will need to take it to the next level. For a start-up that needs funding to help develop a product or take it to market, this will often fall within the range of £200,000 to £500,000. In many cases, the level of funding required dictates where the money will come from so it’s important to be realistic – not asking for too much nor too little – to achieve exactly what you need to.
For more established businesses with strong demonstrable revenues and profits, the capital required will broadly fall between £500,000 to £2m, but every business, growth and scaling plan is different. The important thing is to try and think long-term, as this investment will need to take the business all the way through to the next stage of growth and development, or to the next funding round.
#4 – Determine the valuation
A valuation is a complicated thing and one which it is easy to be emotional about, especially as a founder, but getting it right is one of the most important things you can do during a raise. It is tempting to always go for the highest possible valuation that you can still secure investment for, but this can lead to problems living up to expectations down the line and disappointed investors.
Conversely, of course, undervaluing your business will leave the founder and other shareholders feeling hard done by or disheartened after what could be years of hard work.
It is also at this point that a founder must decide how much of the business he or she is willing to give up. Here, the rule of thirds is a popular one, where the valuation is split between the inventor, the management team and the investment.
At the end of the day the valuation will depend on the investors, investee company and myriad other factors including the sector, revenue and management team, to name just a few.
#5 – Define the unique selling points (USPs) of the business
It sounds obvious but one of the most valuable things a business can have is uniqueness, or something that makes it stand out from the competition. Whether that stems from being the only company to offer a particular product or service, or simply the one doing it best, it is key for your investors to know that the business is not just one of many.
Staying head of the market is also key, if your product is unique, it’s important to understand how long it might take for a rival to come up with something comparable. In this way the business can stay ahead of its rivals, rather than operating under the assumption that current market conditions will continue in the long term.
Once again, investors will also again look to the management team to see if they have a unique and powerful blend of experience. If a business has this and a truly unique, innovative product or service, that’s a big box ticked straight away.
#6 – Patent and protect
Intellectual property is becoming an increasingly important topic as more and more businesses offer services that are mostly intangible or exist only in a digital format. This obviously also applies to easily replicable products, which, with the right patent or protection, can be a great opportunity for investors.
As with anything in the realm of legal protections and regulations, it is important to take on the advice and guidance of a legal professional who is experienced in the area. One thing to be aware of, however, is that you should always do that before seeking to raise or launch a product, as – generally speaking – an idea in the public domain is not eligible for patent.
There are many other protections a business may need before getting really serious and these vary from sector to sector, but each can be important to future success. An investor is not going to back a company that owns all its own equipment but lacks proper insurance, no matter how good the product and management team may be.
#7 – Prepare for due diligence
Due diligence is usually one of the last steps of an investment and is carried out when a deal is agreed, at least in principle. It is also a time when a lot of deals fall through after a previously unknown detail comes to light. Due diligence covers the market the business operates in, key staff, financial information any senior directors or advisors and legal details. Again, what comes under due diligence again varies so do seek professional advice to ensure everything is as it should be.
One way to get ahead of the process, save time and potentially prevent a deal from falling through is to complete as much of the groundwork as possible in advance, and make it readily available to the bank you are working with or any prospective investors. While it may be costly to bring in legal or professional services to carry out this work, it could save the business a significant amount of money in the long term.
#8 – Appoint a solicitor
Finding and appointing the right solicitor is key to an investment being completed smoothly and, more importantly, in good legal standing. It is important to find a professional who is both experienced in similar deals and investments as well as whose fees are appropriate for the size of the deal.
Any equity investments will require legal advice on drawing up new shareholder agreements or amending other documents to reflect the change in ownership structure. It is normally preferable to arrange a fixed fee for the advice needed – it may be slightly more expensive if it everything goes smoothly, but you will be glad you did if anything goes wrong or takes longer than expected.
#9 – Make an exit plan
When searching for investment, it can feel counter-intuitive to be thinking about the exit, or at least the exit for you or your investors. But it is incredibly important not only for your own life and business plan but also for potential investors, who will need an exit in order to achieve a return on their investment. The process will also help you to identify potential rivals – or buyers – as well as previous routes to success. If you have no plan to leave you may not ever need to exit, but it still pays to have a plan.
There are a few main ways to achieve an exit: a merger, an acquisition, an IPO or a private or trade sale. An IPO is at the very top end of the exit journey and involves a complicated process and a huge amount of success; on the other end a private sale can come from anyone from people you know to rival firms. The important thing to show to investors is that you have a plan to exit, generally within three to seven years.
#10 – Find your investors
After going through the above steps and growing a business to the point of scale, finding investors may sound like the simplest step, and yet it can be complicated. You should always seek professional advice before doing so as there are many rules as to who you can and cannot approach, but equally important is identifying your goals.
The level of funding you and your business needs will help to define which investors you are searching for. For early-stage investment and smaller amounts, angel investors may be the best option for the business. Angel investors provide not only capital but also expertise, guidance and experience. This level of funding is not far from what you might see on Dragons’ Den and similarly can unlock doors for your business.
Above this comes private equity and venture capital funding, which typically operates at about £1m of investment. There are a number of different forms of this funding including the Enterprise Investment Scheme or EIS. The EIS is a tax efficient way for investors to back small companies and can be a great option for growing small businesses as investors are typically happy to wait over three years for any returns.
Venture Capital Trusts, or VCTs, also offer benefits to both investor and investee.
Ultimately, as with anything in life, each company’s journey will be unique, but it is always beneficial to go in to the process as prepared as possible. Every business and entrepreneur that myself and IW Capital have invested in over the past 10 years has been unique, but the things they have in common – experience, ambition and determination – form the bedrock of what it is to be successful.
Luke Davis is CEO of IW Capital, the SME growth funding specialist