Plenty of businesses want to raise funds – yet very few are successful. This is because the art of fundraising is generally poorly understood. So, here are the six key steps you need to take if you want to raise funds successfully.
1. Equity or debt or a combination?
All of the money doesn't need to be raised as equity, which has massive implications for dilution. Most business owners forget the debt option; this doesn't affect equity at all and can be a quicker and easier source of funds. For example, Funding Circle in the UK will consider lending to a company which has a two-year history.
A combination of debt and equity is often the ideal solution, as this enables a cheaper cost of capital for the company, as the debt is entitled to interest rather than a dividend, making it less expensive for the company.
30% equity and 70% debt is good ratio and can make the company easier to manage. This is generally the accepted ratio which tax authorities and capital providers like to see. This usually makes the company more likely to attract further equity investment, as the potential shareholders can see that the management has understood that debt needs to be part of the company's financing strategy.
2. Testing your financial model
Put your figures into a spreadsheet and then test them with different scenarios. This will demonstrate that you are prepared for different outcomes. In addition, work out any dependencies which need to be managed,show the different types of returns from the different sources of capital, and include cashflow for at least the next 12-18 months.
3. Getting a realistic valuation
Valuations are key to the fundraising process and it is important not to be delusional about the value of your company. To get a sensible, realistic idea of the value of y our company, compare the most recent valuations for transactions in the space and ensure you have a balanced perspective. Don't pick an outlier valuation, see what all the values are and pick something in the middle. This will show potential investors that you are being reasonable rather than fanciful, and make them more likely to invest.
4. Who do you approach for the money?
For example, Baldetton Capital and Sola Bank work in the area of £100million funding. For £1–5million try the EIS/SEIS and VCT funds,theof pools of EIS investors. This is where a firm like ours can be helpful in providing introductions and knowledge of the market place.
For smaller ambition companies look for Angel Investors. A Google search for Angel networks will get you started. Then dig into each one to see if you meet their criteria.
Don't ignore your own connections. Ask your network for recommendations and introductions, and approach your family and friends. Small amounts add up – and help give you the seed that will attract a bigger fish later.
5. Manage your luck
Once you have drawn up your list of people to contact – work through it systematically and methodically – and always follow up.
Target your funders carefully, do some background research on them so that you know you are contacting the right people, that your business is in their sphere of interest and at the right stage for them, and that the amount of money you are looking for is appropriate for them.
Remember, you can be lucky or unlucky, it's usually not up to you but you do have to make sure that you contact enough funders so that you can start to manage your own luck and tap into as many people as possible.
6. Preparing the information a funder will need
It is essential to prepare a one-page summary of the opportunity. This should be the first piece of information you send out – don't bombard people with lots of information. If you can't summarise your proposition in one page - then you need to go back to the drawing board. Too much information is not helpful. In fact, it's the exact opposite. The vast majority of people prefer to receive information that they can discuss at their leisure and read and then indicate whether they are interested.
This document should include a summary of the opportunity; what investment is being sought and what kind of business is going to be generated as a result, including a potential return if it's possible to identify that. It must be an accurate summary of the business, be clear, concise and easy to read and understand.
Once a potential funder is interested they will then want more information. This document should be approached as a sales presentation and must be able to work on its own – and not require you to be standing there explaining it.
It needs to answer the following questions:
- What is the business?
- Who are the management team?
- What is the market size?
- What is the opportunity within the market?
- How much money is needed?
- What is the money going to be spent on?
- What kind of business will be created post investment?
By following the steps above, you are more likely to be successful at raising the money you need for your business.
Finally, it's important to remember that fund raising is a combination of a sales project and a numbers game; you're going to have sell the business to a lot of potential funders before you find the perfect match
Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround.