The business funding is out there, you just have to know how to get it.
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As we move into the final weeks of 2018, the global economic outlook remains uncertain. International trade tensions, stock market corrections and the ongoing Brexit negotiations are contributing to a general tightening of the capital available to growing businesses.
Despite these tough conditions, the fundraising options available to growth businesses have continued to diversify. Venture Capital Funds (VCs), banks, High Net Worth Individuals (HNWIs), Initial Public Offerings (IPOs) and, most recently, Initial Coin Offerings (ICOs) all offer access to a wealth of capital for those with the right potential.
Our view therefore remains that funding is still readily available if a business’s proposition is of sufficient quality.
Attracting the interest of investors is the first hurdle many businesses face in their journey to scale, but what happens once they’re interested? Here we’ll explore some of the key points to consider when looking for investors.
Investors are ultimately looking to maximise their return and want to be able to ‘buy-into’ a venture that can grow. It is therefore crucial that a business can demonstrate that their enterprise can scale up from its niche into a mature, profitable business.
To achieve this, businesses need to develop a comprehensive business plan which outlines how exactly they will achieve this growth. Whilst their idea may be world changing, the risks and problems they are likely to encounter along the way won’t necessarily be apparent until a plan is mapped out on paper.
Not only is this exercise beneficial in its own right, it also demonstrates to investors that the viability of the business has been considered and a number of growth opportunities have been identified.
The business plan should specifically identify what resources need to be scaled, whilst also outlining what that investment will be used for.
The financial model should go hand-in-hand with the business plan. If a business plan is the articulation and commercial application of the idea, then the financial model is its quantification.
While a business plan may demonstrate that the business proposition is conceptually sound, a financial model is necessary to show how it translates investment into profits and cash.
The key to a good financial model is integration: many models only provide a profit and loss forecast, whereas investors will expect to see projected balance sheets and cashflow forecasts, as well as a clear indication of how the investment requirement has been calculated and a demonstration of what it will be used for. Other factors such as seasonality and any credit terms should also be taken into account.
A good financial model should also detail the assumptions used in building the projections in one place. If revenue and profits are expected to grow significantly, then the model needs to clearly show how and why. These assumptions will be subject to scrutiny, so it is important to be able to isolate them and consider whether they are realistic.
It’s also worth incorporating different scenarios into the model. Investors are used to seeing ambitious projections which show exponential growth in a short space of time, however what if a business’ costs are 33% higher than anticipated? What happens to the business’ cash position if revenue increases at a rate significantly slower than planned?
Ultimately, a sophisticated projection will give a business much greater credibility with investors.
Another key area that investors will consider is the quality of management of the business.
A founder will have the vision and commitment to taking the initial idea from the start-up phase through to maturity, but is this commitment shared and does the team have the skills to facilitate that all important scaling of the business?
A significant challenge founders face is bringing on board the right people, with the right expertise and incentivising them effectively.
As ever, the key is getting the balance right and to invest in talent. Bringing on board an executive with experience of reporting to external investors can be invaluable.
While such individuals may be costly in the short term, the benefits they can bring in terms of proactively identifying issues and lending further credibility to the business in terms of being investment ready can provide a return in the longer term.
Cash is a concern for all businesses, particularly at an early stage in their life cycle, and one way to address this is to issue share options to senior management. By offering them a potential share in the business, the business’ long-term growth is ensured to be in their best interests, while also easing cash flow in the short term.
Receiving external investment is a great moment for any business – it is a confirmation that the market considers the proposition both attractive and viable, and gives businesses an opportunity to embark on the scale up journey.
It also brings with it increased scrutiny. Investors will want regular and timely reports and will expect a business’ internal infrastructure to cope with the scale up that their funding will bring.
Small businesses can initially succeed in spite of poorly designed information systems and financial procedures but as they grow such systems can be not only a hindrance to efficiency but also pose a risk of area of poor performance, errors or even fraud going undetected.
It’s therefore never too early to put in place formal systems and procedures across all financial and operating areas. The importance of having these systems and documenting them is to allow for delegation. As a business grows, so do the demands on a founder’s time, and so the need to delegate duties effectively becomes increasingly important.
All businesses have a range of different processes, from simple tasks such as making a bank payment right through to preparing the budgets and month end management accounts.
All these areas should be subject to the same core control of having one person, typically a more junior team member, perform a task and at least one other person reviewing or checking their work.
This has the triple benefit of spreading the workload more evenly across the business, giving more junior staff the experience necessary to make a valuable contribution and freeing up senior management to add value and focus on growing the business.
With well-structured systems and practices in place, businesses can report to investors with greater accuracy and on time.
Advisor fees can be a significant expense for a growing business and there is a temptation to avoid these by delaying decisions about the financial and legal structure of businesses.
Keeping costs in check is important but good advice pays for itself many times over as a business grows in future years. As advisers to growth businesses looking for investment, we have seen many instances where a poorly constructed share option scheme, inappropriate corporate structure or ongoing employee disputes have emerged in a due diligence process and deterred potential investors.
When appointing advisors, it’s therefore important to look beyond cost and consider their experience, sector expertise and how well they would work with the existing leadership team – it’s as important as recruiting an employee and should be viewed as such.