Warning signs when raising capital from external investors

People often ask me what are the real 'turn-offs' for companies wanting to raise capital from external investors.

Let’s assume for a start that there is a reasonable match between your business and the investor’s requirements: in other words, a willing buyer, willing seller situation. Things could still go horribly wrong if you send any of the following signals.

1. Lack of a clear business model or competitive advantage

Admittedly, most people would have had a difficult job explaining the revenue model of Twitter or Facebook, and look at their valuations now. But such outliers aside, it is often difficult to see a business model for many web-based applications. The same goes for some hardware devices that seem to be doing the same thing as strong and established players in the market, making it difficult to break in.

2. Overemphasis on technology

I know this is a well-known bugbear of mine, as is my aversion to long product demonstrations. But the key point here is that it’s the market that will decide whether a company is successful (with a very few exceptions), and the more specialised the market, the more difficult it is for an investor to be able to access it.

So when you are looking for funding, stress who your customers are and why they buy your product or service. Provide real facts about why the market likes your product and a clear explanation of your route to market.

3. Lack of clarity on the numbers

There is nothing more frustrating than having a business plan where there are large gaps in the key financial information. This may sound boring and accountant-like, but a lack of historical information in a properly explainable format is a real turn-off.

Optimistic future projections that cannot be logically explained are always a warning sign for potential investors. The problem is that budgets built on high sales are always accompanied by a ramp-up in costs and a danger that the forecast cash flows will be similarly unrealistic.

4. Sky-high price expectations

However good the proposition, investors are looking for a return on their money, and pricing something too high to start with just doesn’t work.

Pricing is often linked to the potential size of the market open to the company and whether or not it has the ability to become really big. As a general comment, companies addressing large markets will command larger valuations than those serving niche markets. The important caveat here is that niche markets often give a company the chance to charge premium prices.

5. Management failures

Despite people often saying that past management failures do not matter, I’m not sure that I agree. Clearly, there is always the exception to the rule, and there are some serial entrepreneurs who have started a successful company following past failures, but I believe they are few and far between.

One of the traits I look for in management is the capacity to be flexible, particularly in this market, where things change very quickly. The ability to alter the emphasis of a business, cut costs and find innovative ways to address new markets when the old markets are disappearing can be the difference between a company that succeeds and one that fails.

See also: External investors bring benefits – Best business decision case study


Michael Jackson

Michael founded Elderstreet Investments in 1990 and is its exec chairman. He was also chairman of Sage, the FTSE-100 accounting software group, until 2006. He is a specialist in raising finance and investing...