Fail to prepare, then prepare to fail. Any business seeking funding has a far higher chance of being successful if it prepares well in advance of seeking investment. That applies just as much to traditional bank loan funding but is essential when looking for a private equity.
There are several areas a business should ensure is in the best of health before going to market for early stage/seed investment. These include:
- Building the best management/board team you can;
- Establishing insightful management information and key performance indicators;
- Crystallising your business plan into a single page; and
- Clearly defining what the purpose of the investment
Building the best management/board team you can
It is no secret that investors look to the leader (typically the CEO/founder) but also the management team that has got the business to where it is today. An attractive management team will have a variety of people with different backgrounds, skills and experience.
Often the management team consist of ‘home-grown’ employees who over time have earned the right to be part of the leadership. However, don’t underestimate the value of non-executive directors joining you for a day a month to critically appraise what the business is achieving and contribute to future strategy.
Non-executive directors offer great insight looking outside-in to your business. They also help a business demonstrate how it manages external influence which undoubtedly it will have to do with any investor director joining the team if private equity is successfully raised.
Endeavour to have your ‘A-Team’ working together in a board capacity several months before you begin the process.
Establishing insightful management information and key performance indicators
Any investor will demand good MI and KPIs. The longer these have been in operation the better as it will show trends and how the business reacted along the way.
Encourage debate on MI and KPIs within your management team. Highlighting the obvious numbers – turnover, gross profit, net profit – is useful but peel back the layers. Track your five biggest clients, for example. Are they making up a significant part of your revenue? That could be a risk for any investor.
What about the five biggest monthly expenses? Is the business getting value for money for those services/products?
Are there any quarterly/yearly or even seasonal trends that you may have to explain?
Financial due diligence during a fund-raise is incredibly detailed. Having good quality MI and historical data will make that part of the process far easier if it is ready beforehand.
Crystallising your business plan into a single page
A business needs to be able get over very quickly to a potential investor what the business is today and where it wants to go.
It should show last year’s financial results and the targets for the next three years. It should also show key metrics or milestones, such as the number of people in the business over that period, the current and future markets, and current services/products and those planned for the future.
This single page should start with the vision of the business and clearly show the journey taking it to that vision.
Clearly defining what the purpose of the investment
The clearer the purpose, the easier it will be for an investor to get interested, especially if this is the first investment sought.
If investment is to be used to tackle 10 different parts of the business, an investor is likely to question the clarity required. If, on the other hand, the purpose is well defined, for example scaling the business through sales and marketing, it has a far higher chance of being picked from a bunch of potential deals.
From experience, the single most asked question is ‘what are you going to use the money for?’. Having a clear and precise answer will bring confidence to the conversation and to the investor.
Of course, you must then have the financials to back it up. This is where a well-prepared (get an accountant to do this!) set of forecasts for the next three years is important. If the investor can quickly see how the purpose has a direct impact in the business which is supported by a financial model, that business will be well on the way to finding several suitors.
When you are ready, find a good advisor. Often accountancy practices will have an advisory department to help polish plans and models, and create the business’ ‘deck’ – the brochure for an investor. Also hunt out a good lawyer with a track record.
Not only can the two help manage the process, but they can also be the buffer between the business and the investor – once the deck is out in the market and conversations start to flow, the CEO may not want to be the negotiator around terms of the deal.
The advisor and lawyer perform that role for the business, preserving the relationship between the CEO and the investor who will need to work closely together once the deal is done.
Meet as many potential investors as possible. If available, hunt out investors even before you are ready to go to market. Share the business story (everyone loves a good background story). Ask questions about what they are looking for as an investor.
As many opportunities as can be created will help a business refine its ‘story’ (something every investor looks for) and also prime the CEO for questions when in the market.
Once offers start to arrive, you know you have a strong chance of securing investment. Start now to pull together every piece of documentation you are going to need for the due diligence. A good advisor/lawyer will have a facility to hold these securely and tell you what is needed but expect everything to be disclosed. And I mean, everything.
From there, enjoy the ride. Be prepared for late nights, early mornings, little sleep but plenty of adrenaline. Book a holiday as you are nearing completion. You deserve it.
Speaking from personal experience, all these factors made my business, inCase very appealing. Of course, other factors played their part, not least having a ‘great story’, but without doubt, these four key areas brought credibility, strength, and depth to my business.
That’s not me just saying it – this was genuine feedback from the shortlist of investors I seriously considered partnering alongside which in turn, helped negotiations when it came to agreeing terms.
I would add that without the right people around me – the management team, the advisors, the lawyers – the experience would have been challenging and unpleasant. There are so many spinning plates that there is always a danger that you become a ‘yes-person’ to move things along without considering the ramifications.
Those good people help clear the fog that descends during the process but ultimately the tough decisions had to be made which did include the odd ‘no’ in the hope that the investor didn’t walk away. But it was a lot easier with those people in my corner.