Many businesses require investment at some stage, either to accelerate initial levels of growth, support expansion in the scaling phase or to consolidate market position by funding new product introductions as it reaches maturity.
However, investment comes with additional responsibilities; not only is the pressure on to justify the size of the injection, but there are also the reporting needs of investors to consider too.
In our latest blog, we highlight some of the early signs or flags for investment readiness, explain some of the challenges encountered during the process and reveal how specialists, like iFD, can enhance an investor’s perception of the business.
Estimated reading time: 4:00 minutes
Flags for investment: what are the early signs?
Once a business has reached its organic crescendo, an investment may be the only way to drive the business forward, so identifying key indicators of investment readiness can be crucial for the achievement of long-term ambitions.
When a business is growing momentum matters, and with lower barriers to entry for start-ups and competitors, mature businesses must continue to accelerate to maintain a competitive advantage. This undoubtedly creates pressure on small and medium-sized businesses to compete with established organisations.
Several factors may indicate that an early-stage business is ready to launch a fundraising round, including:
- Competitors may be gaining ground by investing in marketing and new and existing assets or launching regular recruitment campaigns.
- At the pre-revenue stage, an early investment can be crucial to maintain working capital levels and support the day-to-day expenses incurred by the business.
- When marketing is no longer driving the business, an investment may allow for significant advances to be made to enhance the perception of the business amongst investors, customers, and suppliers.
- If demand is increasing in new domestic and foreign markets, an investment may support expansion.
- If business processes have not grown proportionally with the business, performance is deteriorating in the form of missed sales targets and decreasing profitability, an investment can be a valuable injection.
- Aside from supporting organic growth, an investment can also drive acquisitive growth. Though adequate funding, appropriate financial and legal advice, and extensive due diligence is required to ensure the target can be integrated.
Introducing fundraising: what are the options?
There are several options available to early-stage businesses, including:
- Small business bank loan
- Small business grant
- Seed Enterprise Investment Scheme
- Angel investment
- Venture capital funding
Related Article | What is the right investment route for the tech start-up?
The type of preferred investment vehicle will depend on whether the objective is to grow and continue to manage the business or package the company for an exit.
Related Article | How to achieve a premium valuation with exit preparation
Preparing for take-off: consider the runway
Once the early signs of investment readiness have been identified, preparation needs to begin in earnest, and central to this campaign is the business plan.
Whether the management team intends to raise a one-off investment or stoke a series of investments, the fundraising goal will affect the capacity of the business’ runway.
Preparation of statutory paperwork, stress-tests of the business plan, evaluation of a cost-benefit analysis, consideration of the dilution of ownership (in the case of equity investment), and vigorous analysis of in-depth company and industry-level research are core components of any fundraising process.
The typical duration of the fundraising round is generally considered to be between three to six months, depending on the activity of the senior management team.
Different sets of investors will vary in their requirements:
- Professional investors backed by smart money and a network of contacts within the business’ sector may ask for other rights beyond the conventional equity stake, including non-executive director positions.
- Institutional investors, such as venture capitalists, bring more of a model for growth and make the CEO more accountable for business performance.
- Angel investment and equity crowdfunding are alternative options which may be appropriate for some companies.
Before any of these options can be explored, a combination of internal and external stakeholders must be engaged to plan a fundraising campaign.
- The accounting and finance team will prepare the company financials.
- The CEO and senior management team will assess the business plan and inform investors of company strategy.
- The commercial team provides information relating to sales and marketing statistics, product differentiation, industry-level research, and commercial strategy.
- An in-house or outsourced legal team will provide legal advice and may, in the case of larger companies, conduct due diligence on behalf of the company.
- In larger companies, the HR team will provide information relating to talent acquisition, development, and management to support the investment deck.
It is also a prudent idea to consider how much the business is worth, and what it is expected to be worth in the future.
Related Article | How to value your technology business
Key challenges that could impede progress
Since any investment round requires the attention of several stakeholders, some factors could affect a business’ ability to raise funding, including:
- Overzealous investor demands and additional reporting responsibilities may add greater pressure to the senior management team.
- The external fundraising environment can change rapidly. The COVID-19 pandemic and protracted Brexit negotiations are the most topical examples.
- An over-reliance on one key customer or supplier or a high turnover of key members of staff may undermine a fundraising attempt.
Closing thoughts: How to make your business more attractive to investors
In addition to the information outlined in this blog, the Enterprise Investment Scheme can also be deployed to encourage angel investors to invest by offering significant tax benefits. More information about the tax incentive, including how to become EIS eligible, can be found elsewhere on our blog by clicking here.
Having spent several decades of combined experience working with a range of companies, extensive network of investors, and other stakeholders across a range of sectors and industries, iFD has gained a unique insight into the fundraising options available to founders of entrepreneurial businesses.