That Light Bulb Moment: Are You Investment Ready?
Investors may process dozens of Pitch Decks and presentations on any given day. Preparing a Pitch Deck and presentation that makes you and your business proposition stand out from the crowd is just one critical element of getting your business investment-ready. This article looks in detail at how you can maximise your chances of successfully raising equity finance.
Before approaching an investor, you should prepare (i) a one-page Executive Summary summarising your product, (ii) a Pitch Deck and (iii) a Business Plan or financial model.
Care must be taken in the preparation of these documents. You must give investors a reason to sit up and take note of your idea. However, it is not just about what you put on paper. Whilst delivering your presentation, whether in a room in front of the investor or virtually, you need to portray your character and personality. Investors want to work with a focused, determined and driven management team. You also need to spark the investor’s imagination and convince it that your product is going to generate profit. With that said, keep a level head and avoid airing desperation.
Helpfully, investors are becoming increasingly transparent about what they expect to see in Pitch Decks and presentations. Some investors have shared with us some key things they look out for when founders are pitching for investment.
- Is the investment eligible for SEIS or EIS tax relief? Many investors only invest in companies that qualify for these tax reliefs. Take tax advice to ensure that your business can offer SEIS/EIS investment opportunities. It would be prudent to obtain Advanced Assurance from HMRC that your company is SEIS or EIS eligible.
- Understand the fund-raising process and the investor. You are asking an investor to take a risk with its money, or with other peoples’ money. It is essential that you understand at least some of the basic stages of fundraising, and the investors you are pitching to. By investigating your potential investor’s existing portfolio, you will be able to get a flavour for what the investor is interested in.
- Communicate clearly what your product is and why it is unique. Does it build on an existing product, does it plug a gap in a new or existing market, or does it offer a cheaper or more efficient alternative to that provided by your competitors? Is it sufficiently disruptive? Understand your product and how it fits into the relevant market. This means having a full appreciation of what your product is designed to achieve, who your target market is, who your competitors are, and how your product differs from those offered by competitors.
- How will you develop your product and scale the business? Demonstrate how you will scale the business, generate market presence, turnover and profitability by using SMART goals. Help the investor to understand where you see your business over the next 5-year period.
- How can the investor add value to your business? Most investors want to understand how they can bring value to the business, so that they can work with the founders and senior management to make it more profitable and valuable. This added value, which typically comes in the form of introductions to big players or guidance on marketing and strategy can be as valuable as the investment itself. Help the investor to understand where its experience will be most beneficial so that it can scale your business quicker.
- Inject a professional positivity and energy into your investment presentation that forces investors to sit up and take note. Investors want to see enthusiastic, imaginative and driven founders that cultivate the right culture from its management team. Demonstrate passion for your idea and your belief in its potential. Give the investor a feel for the type of culture you are trying to create around your product. Some investors may be swayed by seeing some grey hair on the board, so getting external advisors involved in the business from the outset can be beneficial.
- Is your idea and branding safe? Identify and protect any intellectual property in the product and the branding. Investors will have concerns about backing something that can be replicated by competitors.
- Demonstrate a strong team bond. A positive relationship between the co-founders and the management team is vital. An investor will want to know that it is getting involved with a team of people that gels and which will stand up to the challenges and opportunities faced as the business scales.
- Be realistic and focused with your financial forecasts. Strike a careful balance between demonstrating confidence that your product will generate significant interest and sales and overconfidence, which results in unrealistic numbers and which turns off investors and results in them doubting the whole proposition. Avoid boasting huge revenue numbers. Investors are far too wise to be dazzled by six- or seven-digit numbers that have no credibility. Hone-in on specifics within your financial analysis to demonstrate you are building a healthy and sustainable business.
- Be clear about cash flow and future investment needs. Detail your cash management, any funding the business has received to date, how quickly the business is getting through its funding, the amount of money that is available before additional funding is required and when future funding will be sought. After all, this is why you are standing in front of investors asking for money. You need to know how much you need, by when, for how long, and whether any future investment will be needed for further development of the product. Be aware that most early-stage companies run out of funds before reaching their next funding round, and fund-raising rounds can take months to complete. Last-minute interim financing arrangements to bridge delayed funding rounds can be very expensive, but it would be sensible to be familiar with your options.
- How will the investment be applied? An investor wants to know exactly how its investment will be applied. Break the investment down so that the investor is under no illusions about where its investment is going to be used to develop the business and generate a return on its investment. Put yourself in the investor’s shoes for a moment. The investor is investing in your business because it wants at least one of two things: an income from its investment and/or an increase in the value of its investment. Different investors will have different investment return strategies, and you should try to understand what these are before approaching the investor.
- Be realistic about risks. If you are providing software as a service then you will inevitably lose subscribers at some stage, and this is known as the “churning rate”. Demonstrate to the investor that you are alive to the different risks faced by your business, and that you have taken proper account of them in your forecasts. An investor is likely to appreciate your understanding and acknowledgement of issues that are relevant to your business and market.
- Who are you employing to help you build your business, and how are you rewarding them? Investors want to understand how you intend to retain your staff, and how you will ensure they remain incentivised and feel part of and aligned with the success of the business. Investors, in particular VCs, expect start-ups to have set aside an Option Pool. An Option Pool, in its simplest terms, is a pool of shares that is specifically set aside to be issued to key employees in the future, often subject to performance criteria. This pool would typically constitute 10% of the entire share capital of the company. This arrangement will give investors comfort that the founders recognise the importance of teamwork, and that they are preparing to build a strong team around them which will have a vested interest in the business.
- Avoid approaching investors with a complicated capitalisation table that is littered with minority shareholders. Not only does a busy cap table look scrappy and unattractive but it may present undesirable administration. An investor may be deterred from investing where there is a complicated shareholders’ agreement with numerous minority shareholders, particularly where the new investment creates disruption or friction between those shareholders. Whilst fundraising amongst friends and family can be a great way to raise initial capital, it should be done on soft terms and without overcomplicating the nature, structure and control of the company.
- Avoid using ‘fairy-tale valuations’. This is something we see far too regularly when founders seek investment from friends and family. Giving away 1% of the company’s equity for £100,000 will unlikely be a price that future investors will be inclined to match, and will make them question your understanding of your business and its value, as well as how company valuations and private equity work.
Presenting to investors without having the right information and documents, and without performing appropriate due diligence and getting investment ready will likely tarnish your company and brand, and leave you feeling pretty sheepish when you get turned away. Worse still, you will simply not secure the investment and your start-up will never take off.
Whilst start-ups typically have little opportunity to be picky about who they accept investment from, they should pay close attention to who they are partnering with. You should try to ensure that:
- the investor has sufficiently deep pockets to finance future rounds and will be able and willing to provide bridging finance options between fundraises. Future investors may be deterred from investing in a company whose original investors are not re-investing;
- the investor has credibility so their investment will attract other credible investors;
- the investor has the right experience together with a suitable network of connections which can help a start-up to shortcut growth;
- the investor has the means, resources and willingness to provide start-ups with advice based on their experiences, which will also help to speed up growth; and
- there is the right chemistry between the investor and the founders.
Some investors will not be prepared to invest without some kind of track record and trading history. Although investors are prepared to take risks for large rewards, backing an unvalidated product may be a risk too far for many. You may therefore have to win some big clients and generate some trading activity to attract your ideal investors. Of course, this depends on the nature of your start-up business.
Once you have done your homework, reach out to investors early on and stay fully invested in the process throughout. Do not be slow or tentative as not only will you fail to access the finance you need quickly enough, but investors will sense traits which are not fitting of a successful and driven entrepreneur looking to disrupt a market. Even if an investor says that your business is not yet in the right place for it to want to invest, it might be interested in developing a relation with you so that it can invest in the future. Building strong relationships, keeping doors open and bridges strong is critical to successful future fund-raises.
Be creative about approaching investors. Established VCs will have invested in dozens or even hundreds of start-ups. Why not identify those start-up businesses and reach out to their founders to learn how they successfully raised funds from that VC, and the relationship they have with that VC? They might be prepared to introduce you to the VC, or other VCs they think you are better suited to partnering with.
As touched on above, your investor should be more than just an investor. An experienced investor will form an integral part of your business and become a valuable and trusted partner. It should be treated as a trusted advisor which strengthens your board and existing advisors, and as someone that will be an integral part of the business’s growth and success – after all, your interests are strongly aligned. The investor should be experienced and connected in the relevant sector, and you should exploit that experience and those connections as far as you can.
If an investor makes an offer to invest in your business, avoid biting its hand off. If one investor is interested then it is entirely plausible that other investors may be interested in your business, and this gives you valuable leverage to negotiate better investment terms.
Be clear with the investor about what it expects from you. Details will be formalised within the investment documentation, but you will want to gauge what the investor really wants on a day to day basis, and what is most important to it. This will help to ensure that you maintain a strong relationship with your investor.
Finally, as a word of advice, avoid using template forms when trying to raise finance. These frequently need unpicking and will add to the stress, time and costs of getting your business ready to take investment.
At Greenwoods GRM our team of experienced lawyers can work with you to get your business investment ready, with support from our vast network of advisors in the start-up eco-system.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. For advice, get in touch with your usual Greenwoods GRM contact or scroll down to complete our enquiry form.