Published: Dec 03, 2020
Focus:
Insights
Securing the right funding at the right time is one of the most important steps senior management will have to make to ensure a business is in a strong position to scale-up. Julie Glenny, Investment Director at Maven, looks at the five things a business needs to consider to give themselves the best chance of sourcing the funding they require.
Many businesses follow a similar route to fundraising, relying at the outset on friends and family for financial support before progressing to high net worth individuals or angel investors for seed funding. The process of fundraising changes markedly once a business reaches Series A financing and looks to secure its first institutional investment, moving from less formal structures to one where the quality and presentation of information contribute greatly to the eventual outcome and become key to success. Frustratingly, there are many businesses with real growth potential that fail to attract investment simply because they lack the necessary skills to understand and meet investor expectations.
In my role I’ve seen many different approaches to fundraising, with varying degrees of quality, and there are some stand out pieces of advice that should be helpful to any business owners looking to embark on this process.
1/ Be prepared
It may seem obvious, but the earlier the groundwork commences on preparing for a fundraise, the better. Being aware of your cash runway is critical to understanding the available timeframe for closing the funding round and prevents placing the business under unnecessary pressure. The process of fundraising can be challenging enough without the looming prospect of running out of cash being added to the mix!
Good management information facilitates early discussions with potential investors and helps them achieve a sound understanding of the business. It also prevents various time-consuming cycles of circling back and forth with numerous information requests. Data rooms are often a sensible option for collating a single source of information in an organised format with access easily controlled and managed by the business.
2/ Appoint a Corporate Finance Advisor
The value of appointing a corporate finance advisor is not always immediately obvious to business owners, who on occasion believe they’re better placed to manage the process themselves and save some cost along the way. More often than not this is doomed to failure and simply adds more time to the process as limited progress is achieved. That said, the wrong choice of advisor can be equally damaging. Key is selecting someone who knows the sector, has track record of the particular size of raise and has assisted companies at a similar stage of growth.
A corporate finance advisor will assist with preparation of the business plan and financial model as well as managing the process and timetable, including negotiation of terms with potential investors. They are used to working with institutional investors, speak the same language, and understand market norms. Their ability to utilise their existing network of contacts will lead to a more efficient process and provide access to the relevant funders.
3/ Have a clear strategy
It’s important not to underestimate the importance of having a credible plan which demonstrates understanding of the market and how growth will be achieved. Investors will scrutinise pipeline information, key metrics and analyse the company’s competitive positioning to determine the likelihood of the plan being delivered. All aspects of the growth strategy need to be clearly articulated including potential risks and how these will be mitigated.
Robust cashflow forecasting is also essential, in order to establish how much investment is needed, highlight key investment needs and demonstrate understanding of the cash cycle of the business. It’s not uncommon for business owners to underplay the funding requirement and fail to ask for sufficient investment. No-one wants to be in a position of living hand to mouth or continually moving from one funding round to the next and, as a guide, the investment should provide a cash runway of at least 12 to 18 months.
4/ Choose your Investor wisely
Understanding a potential investor’s investment criteria and track record of deliverability is important at the outset. There is little point in pursuing an investor who is either unable or unwilling to invest. Assuming the deal progresses however, benefit will accrue from early establishment of the investor’s experience of businesses of similar stage/scale, understanding how the investment will be managed and what value add can be gained. In all likelihood an investor representative will have a seat at the Board table and be actively involved in decisions affecting the future of the business. It may sound cliched but choosing a good investor is about much more than just the money. Private equity investment is a shared journey, where results are optimised when there is alignment in interests and all parties have a common vision for driving the business forward and maximising value. Clearly though money is important and an investor’s ability to follow the initial investment may be significant in your choice of partner if subsequent funding rounds are anticipated.
5/ Allocate resource
Funding rounds are time-consuming and potentially distracting from the core day to day business. The deal process involves many stakeholders – advisors, lawyers, due diligence providers – all vying for attention and many management teams simply take their eye off the ball whilst embroiled in the investment process. This can impact adversely on trading results and make for difficult conversations in the early stages of the investor relationship. If possible, allocate a dedicated management resource within the business to run the entire investment process and leave the remaining management team to focus on their usual fields of responsibility.
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