Tag Archives: Investment

What will make my business more attractive to Investors?

How to get Investment Investors have a lot of choice and you are in competition with all other investment opportunities, the final decision on which gets investment will be those with the best combination of good sustainable profit and lowest risk.

That may not be the highest profit, or the least risk, but an acceptable (to that Investor) mixture of the two.

The following will greatly help your chances of investment:

1. Know your market
- Show it is growing and sustainable (use facts)
- That you know the competition
- You can say what your competitive edge or uniqueness is
- What issue or need you will address
- Who will buy your product / service (your target customer)

2. Proof
Great ideas are a dime a dozen and investors have heard all the hype before, the more you can do to show your concept works and people will buy it, the better your chances of investment.
- Projects just at the idea stage seldom get funding
- For new products you at least need a prototype
- For services or retail you need at least some sales

3. Gain confidence in your ability to grow their investment and that you can work with the Investors
- Previous experience in this market
- Good work ethic and energy
- Confident, not arrogant, you must be open to input and be flexible
- Ideally an experienced team of people who can execute the plan, this isn’t always possible, so show you know where gaps may be and how you will fill them. Too many gaps however will start to increase the risk

4. Business model and implementation

- How you will make money (and a profit) from this great opportunity
- Understand all the costs and numbers, making sure they are realistic
- An exciting but achievable sales forecast
- It’s not often the idea but how it is implemented that counts, show that you understand this

5. Skin in the game
- Have you invested your own money in this? Investors like to see that you are committed and taking the same risks that they are. Sometimes your own funds may not allow much opportunity to do so; in which case you will need to talk about the other commitments you’ve made to the business.

6. Government tax breaks and Incentives
In the UK there is the Enterprise Investment Scheme (EIS), in the USA there are local State incentives to encourage new small businesses in their area. Some States have more advantageous and flexible tax breaks if you incorporate there, such as Delaware, Nevada and Wyoming.

Where ever you are, look into such incentives and show Investors you are knowledgeable. Don’t expect free grants to be available anywhere however, those days are past.

7. Lean start-up
Investors will expect you to use their investment to grow the business. Not mainly to pay you a salary or provide you with corporate luxuries. Show you are using the lean start-up principle; you can begin taking a better salary and working conditions as the profit grows.

Finally, make sure your plan is clear and that you are able to describe in a sentence what your business does. In one more sentence you should be able to describe your business model (how you will make money from the activity).

Clarity goes a long way in convincing Investors that you know what you are doing and that they can intrust their funds to you.

Types of Business Funding

Seed money

Do you need funding?

Start-up businesses often think that they need to find an investor. We only have to read in the papers about the latest internet billionaire to know that big funding means big success.

Yet most businesses can get going, or even grow without external investment. It depends on the amount required to gain entry into your market and whether you have sufficient funds to make a start, perhaps growing organically through sales.

The injection of funds into a business can however jump-start a project, or allow a more rapid growth. So if funding is desired it’s useful to think about the options for doing so:

Investment cycle

There is a natural progression of how a business is funded. Initially it may be that the business is financed by the owner or by approaching family and friends. This may be sufficient by itself for your business.

Alternatively, or perhaps as a follow-on, a local bank might be approached. Although nowadays these have been less helpful for young businesses, so after proving the concept, many tend to seek business angels.

At the next stage beyond this, venture capital firms might be brought in. Few companies go straight out and raise multi-millions; those that do are often high-tech businesses with known entrepreneurs, or ground breaking technology.

Types of funding:

Self-funded
Traditionally the way that the majority of businesses get going. For further investment it also shows your commitment in that you have put your own money into the concept and is invaluable in gaining that first bit of traction that Investors look for.

If the start-up business is taking the form of a partnership it will need to be made clear in the partnership agreement exactly how much of the funding each partner is providing and whether this entitles them to a greater or lesser proportion of the partnership profits. See Partnership Agreements

Loans
Banks will normally only loan money against you having security to offer. These may be assets of the business or personal assets such as your house. They are not entrepreneurial and don’t take risks based on you having a good idea.

Many Business Angels will include a loan in addition to purchasing equity in the business as part of the way in which the funding deal is structured.

Private equity funding
This is the generic name for sources of funding, normally in exchange for equity in the business. It includes both Business Angels and Venture Capital companies. People sometimes confuse the two. The differences are:

Business Angels

Anything from £1000 to £1M (although that would require several banded together).
Will look at start-ups and young businesses
Since they are investing their own money they can take more risk.
Often want to contribute knowledge or contacts

Venture Capital

£1M plus (normally)
Not for start-ups or just at idea stage
They are investing a fund comprised of other people’s money, so have to take less risk than Business Angels.
May place own people on board and require strict reporting

When exchanging equity in a business for funds a legal document must be agreed that specifies the terms of the investment. Venture Capital companies will have a range of agreements to use from Investor Rights Agreements, Stock Purchase Agreements and Term Sheets. It can be expensive and time consuming to raise money.

Agreements with Business Angels can be quicker and much less costly to organise, but never be tempted to cut costs so much that a well thought out signed agreement is neglected. There has been much woe and falling out of parties when issues occur that haven’t been previously considered and placed in a legal document.

Private equity funding can come in stages as the business grows:

• Seed funding
• First round
• Second round
• Later stage
• Mezzanine
See Types of Private Equity funding

Grants
There are only a few government or institutional grants available to businesses. These tend to be market sector and geography specific. Whilst serving a useful purpose for those able to claim them, they are so few that they are not applicable to most businesses and so not covered here.

For young businesses, the more you can do in proving your concept works and gaining what is called “traction” the more offers of help you will get and be in a better place to negotiate terms.

The difference between a Business Partner and an Investor

2 Business Partners – Bill Hewlett and Dave Packard

Company Partners provide access to both Business Partners and Investors so what is the difference and when would you have one but not the other?

Certainly an Investor is a business partner of sorts and can bring many of the benefits of a business partner. A Business Partner could in some circumstances end up investing in the business, so here is my take on the similarities and difference:

Business Partner

Hands-on
Brings additional, complementary skills
Sometimes useful contacts
Will share in the profits of the business
Likely to own some share of the business, or be given the opportunity to buy or earn shares
More commitment and “skin in the game” than just an employee
Primarily brought in for their expertise and ability to add value when working in the company

Investor

May be hands-on, but often not.
Skill set frequently is in business planning, finance and strategic direction
Normally valuable contacts are available
Will share in the profits of the business
Injection of funds (to be used to grow the business) in exchange for equity in that business
Doesn’t want to run the company, but will expect involvement in major decisions and report on progress
Primarily brought in to provide funds, advice and contacts

If you need another pair of hands with essential expertise go for a Business Partner, if you primarily require funds and contacts, go for a Investor. Both will provide a sounding board and be able to provide advice.

What is due-diligence and how do I do it?

Due-diligence needs thinking about for Investors when they are about to embark on an investment. However it’s just as applicable for those who are seeking investment to check out a potential Investor. In both cases you should verify that the person, business and facts as stated are correct.

That’s not being mistrustful it’s just being business-like and expected by all parties to a potential funding agreement.

There are several types of due-diligence, not all will necessarily be relevant and this list is not exhaustive, but does illustrate the common areas to consider:

Legal

Are there IP (Intellectual Property) rights involved?
Any pending litigation or disputes?
Legal structure and ownership including share holdings and any restrictions
Regulation or licences that may be necessary for doing business

Financial

Verify financial information provided
Obtain bank accounts and statements
Examination of accounts and underlying performance of business
Details of any property owned by the business, including mortgages

Commercial

The market that the business operates within and its market share
Customers: list of major customers. Is the business dependant on just a few customers? Can you talk to some customers?
Suppliers: list of major suppliers. Is the business dependant on a few suppliers?
Competitors and the unique advantage that this business may have.
Assumptions that lie behind the business plan
Insurances held
Guarantees and terms & conditions of sale that the business gives

Human Resources

Management background check
Key personnel staying / losing
Pension commitments

IT / Systems

Hardware and important software used within the business
State of the systems, are they up-to-date, using appropriate technology
Compatibility to any existing systems if merging businesses

For Investors, where possible always use professional legal and accounting firms who will have a VERY detailed question check list for carrying out due-diligence. For smaller or even start-up businesses it may be that a simple management check and time taken to understand the market and the advantages of the business is enough. That is for you to decide, but you must make sure you do all necessary to verify people and facts.

Both Investors and Business Owners should be aware that due-diligence takes time and can be detrimental for the business when the owner is distracted from normal operating duties by needing to find all the due-diligence documentation required and in answering the questions raised, but it is an essential part of selling or getting investment.

Don’t make this mistake in your first conversation with a potential business partner or Investor

Investor listening You don’t know when you might bump into or be talking to a useful contact, business partner or even potential Investor. This first conversation is your best chance to impress and could determine whether you get a second more detailed conversation or meeting.

So grab the chance to explain your business, or idea, in a way that is clear and compelling.

Sounds easy, yet this is where otherwise excellent entrepreneurs make a big mistake. They are not prepared and simply ramble on in every direction. Think about it, can you tell me about your concept in a way that I will really understand and allow me to be excited about joining you as a business partner or Investor?

Some entrepreneurs are very good at this and you may be one of them, but the majority of people I talk to make a terrible hash of it. When they finish I am none the wiser and couldn’t honestly recommend them to the business partners and Investors I meet.

You’ve heard of the now clichéd Elevator Pitch where you describe your business in the time it takes to travel up in an elevator to a prospective customer/Investor. Well that concept came about because it was a useful way of visualising what was needed. So don’t be too quick in dismissing it as old hat.

Here are my top tips for engaging interest in your business when you first talk to a potential business partner or Investor. This is not an investment pitch or a presentation, but simply an opportunity for a quick conversation with a potential ally in growing your business.

1. Think about the situation and how much detail you need to go into. Is it a chance encounter with someone at an event, or a telephone call with a business angel where you have time to prepare?

2. Don’t start spouting words at machine gun pace, never giving pause for questions, or even noticing that you’re on entirely the wrong track of what was asked. Use your empathy and listen. Use the feedback you are getting, visually or by asking “is that what you meant”, “does that make sense” (if on the telephone).

3. Prepare an explanation of your business. Write it down and then practice saying it out loud. Writing the explanation down forces you to think about it and ensures it flows logically. After you have talked to someone about your business, reflect on how that went and make adjustments. You’d be surprised how many people don’t.

4. Have 2 versions – one that may take just 30 seconds which gives the whole concept in a nutshell and a second version that allows a bit more detail taking a few minutes.

5. This is what potential business partners and Investors want to hear:

Who you are, your experience and your knowledge relevant to making the business a success.
The market area that you are in and the size & potential of that market.
What your company/business/project/idea does. Clearly – so that there is no misunderstanding or confusion. This needs trying out on people who have never heard of your activity.
What problem does your business solve for clients/customers? What advantage does it give them? What desire or aspiration does it allow?
What is your uniqueness, how do you compare to your competition?

The listener should now have a initial understanding of you, your business potential and the market, if it is appropriate you should also add what you are looking for in order to grow that business. A Partner, a Mentor, an Investor, contacts, sales help or whichever you need.

Remember, experienced business people and especially Investors have heard it all before, don’t boast, don’t over-hype, be professional and have a couple statistics in mind to throw in that supports your claims – it will impress.

With good planning and thought you can make a favourable impression with whoever you meet – you never know where it may lead.

Are you ready for investment?

Being investment ready is key to getting funding. Yet when talking to entrepreneurs they often have not taken the time to think it through.

You are up against a lot of competition for business investment. Some may be better prepared than you to give the potential Investor confidence that his investment will be well spent and payback a healthy return.

So what can you do to be ready for an Investor and how can you give yourself the best chance against the competition?

Business Plan. Okay there is a ton of information on this available, including on this site so I’m not going to go into how to do a plan (see the links below). Just to say that you will benefit from having one:

Putting a plan down on paper forces you to think through what you are doing. The market, your offering, sales & marketing, putting together an experienced team, the business model and finances
It provides a basis for discussions
Shows Investors that you are professional, serious about the project and are thinking of every aspect of the business
Investors cannot see everyone; they will want to first have a few pages (Exec Summary) of a business plan and then follow-up the ones with which they are interested.

Getting started on a Business Plan

Structure of a Business Plan

If an existing business:

Make sure that what you are doing at the moment is profitable, if not profitable show why it will be
Build your revenue with a sales drive to show the business to its best effect

For start-ups:

If based on a new type of product, make a prototype
Show it is not just a good idea, but that it will actually sell by getting positive customer comments, or letters of intent to order.
Produce a market survey that supports your product or service. Don’t simply say “everyone I’ve asked likes it”.

Be able to explain in a couple of sentences what your business does, its advantages over the competition, how it will make money and who its customers will be. Have evidence to hand to support your numbers.

Know what you are going to spend any investment on. Make sure that it’s not just to pay you a salary, or all thrown at marketing.

What role will you expect the Investor to take, some are looking for an active role in the company, some only expect to give advice, very few will consider just giving funding and stepping back completely.

How will the Investor get a return? A sale of the business, a buy back of shares, interest /dividend payments? Over what time?

Look at government Investor incentives. In the USA there are quite a few States that are trying to attract businesses, basing your company in that area can give tax advantages to the company and potential Investors.

In the UK there are the EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme).

These are attractive to potential Investors and may make the difference in choosing your opportunity or someone else’s. A quick way of getting a foothold on to these incentive schemes and be able to show Investors the potential, is to get a statement from the Inland Revenue (HMRC) that your business is likely to qualify for the scheme called a EIS Advanced Assurance

Finding investment is not necessarily quick. Realise it will take time and energy. Be persistent and turn over every stone to find the right investor that understands your market and is excited by the team and opportunity that you have.

The right management team for funding

Company Structure Many of the people that I’ve talked to recently are individuals, they have a need for funding to start-up or to get greater growth, so they are talking to me about finding investment.

After asking about what they have done to prove the concept and reduce the risk to an Investor, the next thing that I ask about is who is behind the business.

From an Investor’s viewpoint they will want to see that whoever is involved has the capability and experience to make a success of the investment, they don’t necessarily have to have a comprehensive and large team behind them.

It some cases the Investor may in fact want to become active in the business and so will be looking to see where they can add value. If for example the Investor has a financial background, a business where the owner is an expert in the market and product, but could benefit from additional business skills would be an attractive fit.

There are Investors though, who whilst willing to contribute experience and contacts would not want to be involved in the day-to-day activity. They ideally would like to see all the bases covered by a solid team of experienced and talented people with a strong commitment to success.

By “bases” we are talking about Product/Service development, Sales & Marketing, and Administration/Finance.

So if you as the owner of the business have one of those areas covered, you should be looking to have brought in partners or employees to cover the rest.

There has also been a trend in recent years for fast-growth businesses to bring high profile Chairman into the company. These figureheads add credibility to the venture, help with their advice and will be experienced in talking to people such as Investors.

Even at a more modest business level bringing senior people in as Non-Execs to add authority and experience can be positive to Investors. It reassures them that the business has the talent to grow with some help, but not requiring a lot of their limited time.

That may of course be less attractive if the Investor has ambitions to be an active part of the team themselves, so consider what your potential Investor’s preferred role may be and that could shape how you present your team.

Having said this about building a team for investment, if the business is one that looks destined for high-growth, Investors will bring in specialists and experienced people to fill any gaps. But for the majority of businesses a little thought on shaping the management team will give credibility to an investment proposal.

Sales and Marketing Plans

Whether you’re writing a business plan, or simply want to make sure that your business has customers, you are going to need a sales plan and a marketing plan.

Yes need. Not optional, not nice to have – need.

First let’s get over the instinctive dread of the word plan. It doesn’t have to mean a formal document, but it does need to be written down. Writing forces you to think and you can’t get away with the woolly thoughts that are there when this is only in your head.

Notice also that I separated the two. People use the phrase sales & marketing, but they are two complementary areas of your business activity. You can write them separately or joined together in one overall plan.

When I talk to entrepreneurs they can chat for hours about the features of their product, but ask how they will sell it, or how people will find out about it and a there is a vague response of “oh that’s what I need money for, to advertise and stuff”.

It’s far more interesting to think about the product or service than about the practicalities of how you will sell them. Until the business fails because you don’t have customers. Or you don’t attract investment.

So what is in a sales and a marketing plan? Which do you do first?

Start with the marketing plan, because part of that is defining who and where your target market is. You’ll need to know that in order to sell to them. I wrote an article about this: How-to-Market-Smarter

The contents and emphasis will vary depending on the type of business, it’s complexity and of course the market it operates in, but in general a marketing plan will have:

A description of the market you are operating within, think about the geography and demographics. You can include how the economy affects this market. A cut-rate supermarket does better in a difficult economy for instance.

Who are your competitors, their pros and cons. What is your strategy for competing against them?

Who you are selling to, your ideal customer. As mentioned in my article above, it should be broken down into segments.

Branding, values, colours, logo – the message you want to communicate. Cheap and functional or premium and exclusive, this is where you decide what people think when they hear your company’s name.

Products and services with pricing strategy – no need here to go into depth on every product functionality. Rather the strategy of what type of products and services.

Lead generation – this includes PR, advertising, web sites, referrals, direct mail, attending exhibitions, giving local talks, networking… Be specific, don’t just say for instance you will advertise, give a list of publications and the dates you’ll appear.

Marketing costs – put together a spreadsheet showing the costs of each of these marketing activities.

Once the marketing activity is generating leads, how will you turn those into sales? This is the sales plan.

Sales strategy – do you have your own sales force, will you have distributors, is your business web based only or perhaps a high street shop.

Sales process – how do you qualify the leads generated, how do you engage with them, key sales messages,

Service experience – how will you later follow them up, retaining customers and encouraging them to buy again.

Sales forecast – compile a spreadsheet by month for the year (plus a year 2 and year 3 total if doing a business plan for investment). Broken down by product or service category. Sometimes it’s hard to forecast for a new business but you must make a stab. Note down your assumptions of why you forecast those numbers, so when it proves wrong you know why and can adjust it.

It takes time and we are all busy, but there is no alternative, you can’t run a successful business without a sales plan or a marketing plan.

The Business Angel – a hidden treasure of resources

Happy New Year all. Time for reflection and to reinvigorate ourselves. Hope 2014 is a great year for you.

Thought I’d share a little known resource that may be of interest to people. We’ve put in one place good information for both entrepreneurs and Investors including some great tips from active Investors, worth a look…TheBusinessAngel.org

There’s pointers to many other resources as well and if there is anything we’ve missed, let me know, we’ll add it in.

The 5 key things you must do before revealing your great idea

I often get calls from members who are looking for a Business Partner or Investor but are concerned about how much they can reveal of their business idea.

It is a conundrum; because on one hand you need to tell something of your business idea in order to attract a partner or funding, but too much and surely the idea will just be stolen. In my experience this is the 5 actions you must do before telling all:

Determine if your idea is patentable. Generally patents relate to new inventions that are not obvious to anyone with knowledge of the subject and can be used in some sort of industry.

You may need to employ a patent agent in order to see if your idea is patentable. We have more about patent agents in our resource pages.

If it is patentable, you should not tell anyone about it until you have applied for the patent, otherwise the idea could be considered in the public domain.
If it is not patentable, can the design of your product or brand be registered?
Design registration applies to the shape, colour and style of products that aren’t in themselves new ideas but protect your particular design.Again we have an article on our resource pages on this, see Design Registration.
Think about protecting your brand. This is your logo, product names or packaging and any distinguishing ways you have of representing yourself. See How Trademarks Work and this resource has information on Copyrights.
Spotted a gap in the market? Have a novel way of doing business?
Unfortunately there’s no registration that will protect ways of doing business or addressing a new market area.

If you are concerned about discussing your original idea for a business with a potential partner or Investor you could ask them to sign a Non-disclosure Agreement. You can see a NDA example here.
Finally, get first mover advantage. If your great business idea really is good, eventually others will start to copy you. This is inevitable, but by being the first to market you will already have captured some customer’s loyalty and will be ahead of the competition in terms of understanding the market and developing your product or service.
To grab that first mover advantage you must move fast and when you have launched keep innovating, don’t rest on your laurels.

To give a bit of reassurance, in all the time that I have been advising and helping people with business plans and bringing business partners and Investors together I’ve seen no cases where an idea has been stolen.

Generally it is the implementation of the business idea rather than the idea itself which counts. There are a lot of good ideas, but most never get off the drawing board and the ones that are successful are those that are not only acted upon, but are executed brilliantly.

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