How to prepare your start-up for investment
If it’s time to start looking for investment into your business, there are several things you need to consider before you open up to external interrogation. Neglecting to do this could have the exact opposite effect and turn investors away.
Understanding the most suitable type of investment for your business will lead to a higher chance of success, avoiding asking the wrong people for the wrong thing. With this in mind, let’s look at some of the types of investment available.
Angel investors are individuals of wealth, investing early in start-ups in return for equity (a stake in your business). Quite often they are acquaintances of the entrepreneur starting the business and help the business get off the ground, but there are also organisations such as our friends at Innovation Supernetwork who run hubs preparing and connecting young businesses with investors.
Being part of the business so early, Angel investors will be looking at the founder’s passion and commitment to the business, as well as how well thought-out the business plan is, to ensure their money doesn’t go down the drain. They often play an active part of the business and usually bring a lot of experience, knowledge and contacts.
Crowdfunding investment has become increasingly popular and raises funds from multiple donors, often in return for a reward of sorts such as a free product or in some cases equity
Crowdfunders will be looking for ventures that interest them, rather than a return on their investment, so how the founder markets their idea and how they engage with the audience is extremely important. Crowdfunding requires lots of planning and time; it’s not easy.
Venture capital (VC) funds or companies are private investors looking for businesses with high growth potential, and therefore big returns for their investment. They often take a very active role in decision making, to maximise the success of the business.
VC businesses invest for a living and therefore are experts in the process. Founders’ elevator pitches need to be perfect, as well as their financial records. VCs fund businesses at various stages of growth, only a few may provide pre-SEED or SEED funding (early-stage investment) so do your homework before making contact.
Local authorities or support hubs, such as our partners Business Durham, often offer businesses access to a range of grant funding. Eligibility can differ from fund to fund, but do not usually require a stake in the business.
Small business credit cards and loans offer businesses access to borrowed funds but require paying back with interest. While they can provide quick access to funds without interference in the business workings, they can be difficult to obtain if the business lacks sales history, or they may need to be linked to the owner’s personal credit score, increasing the personal risk.
While each type of investor tends to focus on a particular area more than others, it pays to have the following areas to cover all bases.
Firstly, understand what success looks like in your business and align your messaging, such as your mission statement. What are you trying to achieve with investment? Make sure your ambitions are contained in your business plan or pitch deck, which investors will delve in to, and that your actions are leading to achieving your ambitions.
Whatever the reason for investment, understand your target market inside out; update your personas and be able to clearly explain how the investment going to retain and grow your customer base.
Tidy up your business behind the scenes, physically and digitally. Have tidy, organised physical records of your business and finances, clear any debt if you can. Make sure you have accurate financial records, update your sales forecasting, and hire an accountant if you need to, to get your finances in order before your reach out to investors as they’ll be put off by wading through reams of messy records.
Create a plan to demonstrate to potential investors that you fully understand where your business currently is, how you’re going to spend their money and what the expected returns will be. This is particularly useful if you lack confidence in presenting, as having easy access to the written information will help you keep on track. Don’t fear including areas that you’re not an expert in; explain how you plan to combat that as part of the investment – no one can do everything, and they get that.
Fine tune your elevator pitch – a 30 second summary of your business to get investors interested and wanting to know more. Be able to then pitch succinctly what your business does, how you meet the needs of customers and how you stand out from competitors, reverting to the details of your plan if you need to. Be ready to answer questions after your pitch, as it’s likely any interested parties will want to know more, and also keep in touch with them afterwards.
Lastly, believe in yourself – it’s ok to be nervous but if you’re not sure you can make a success of your business yourself, then you’re fighting a losing battle trying to convince someone else to part with their money.
If you’re interested in a helping hand this and more, our incubator programme offers businesses with a finance workshop as well as access to experts on a regular basis. You can apply for our next enrolment now, and in the meantime, grow your knowledge through the varied library of blogs we have.