“What should I do to raise investment for my business?” It may be you, me or any other successful entrepreneur you can name- there will be none who never asked this question. According to a recent article published by Forbes, over 90% of new businesses fail during the first year of operation. The major reason behind theses failure of a business is lack of funds. Like blood in our body, money connects all the vital parts of a business, including capital, purchases, promotion and so on.
The long journey from the idea to revenue generation and expansion of a business needs a fuel named capital. That’s why, at almost every stage of the business, entrepreneurs find themselves asking – How do I raise capital for my business?
The answer for this question is depending on n number of factors. Following are 10 critical things to be kept in your mind if you are planning to raise investment for your business:
1. Create a strong business and financial plan
Whether it is a short weekend trip or building a house, there must be a plan for it. It should not be different for your business also. For starting a new business or for expanding an established one, there should be crystal clear plan to be prepared. This is the complete roadmap and blueprint of your business. It must include a solid development and operations strategy, market study and marketing strategy, risk management, revenue model and financial projection, investment offering, exit strategy and other essential items needed for your business to succeed. If your project, technology or business is subject to scalability to other countries, regions, markets this is important to mention in your business plan.
2. You must know your USP (Unique Selling Proposition)
The success and sustainability of a business is directly related to the ability of its products/services to address and fulfil the need of your target customers. In the investors language it is known as the USP of a business. The USP of your business can be anything that can attract and retain a customer, including Quality, location, pricing and so on. For example, if you are running a restaurant business, sometimes your USP may be the pricing, it may be the location very near to a crowded tourist place, or it can be a famous master chef in your kitchen. Thus, your investment offer should be clear and convincing about the USP and how the business addresses customer needs.
3. Make the investor a fan of your team
I am sure that all of you have a favourite sporting game and you must be a fan of favourite team. Have you ever thought why did you become a fan of that team? The factors that made you a fan of a particular team might be a lot many. Sometimes it might be your favourite player, the captain, the team coach etc. Just like the factors made you a fan, your investor will also consider who are the team members, the director, the consultants, advisory board, whom you are associating with for various purposes etc. Having a professional team is very key in your capital raising plan.
So, build your team with the best captain, best player, best coach & advisors and make your investor a fan of your business.
4. Be realistic in valuation and dilution terms
As a team of transaction advisory consultants, we come across a lot of business valuation engagements for both start-ups and established businesses. There are a number of methods for assessing the value of your business. This includes Discounted Cash Flow (DCF) method, Net Asset Value (NAV), Comparable Transactions method, EBITDA multiple methods etc. The selection of appropriate method for valuation of your business will be based on the nature of business, number of years you are being in the business, the future potential, assets you are holding, and many other factors.
The dilution and percentage of shares offered to the investor will be based on the valuation of your business. Having a higher value of business, dilution will be lesser and vice versa. For example, your valuation is 20 Crores and fund requirement is 2 Crores, you have to dilute and offer 10 percent of your shares in the business. If the valuation is 10 Crore and fund requirement continues to be the same 2 Crores, you have to dilute 20 percent.
And the most important thing you have to keep in mind is that for reducing the dilution percent, never exaggerate your business value to an unrealistic number. Many entrepreneurs value their company on their dreams of being worth tens of millions or more, but this will create an adverse impact on the investor rather than creating an interest.
5. The legal entity and capital structure
Like any other thing, having a proper structure is very important in raising capital for business as well as for long term sustainability of the business. The structure of business has to be decided based on multiple factors. That includes, the nature of business activity, who are the shareholders/partners, the profit distribution pattern, external funding plans, Foreign Direct Investment (FDI) plans and many other factors. For example, if your vision is to raise an investment form a Venture Capital firm and then after go for Series A, B and C and finally for IPO, the suggested structure of your legal entity would be of a company. On the other hand, if your vision is to raise funds from local market based on your customised needs, terms on funding, profit distribution and exit plans, structure of an LLP would be advisable.
Anyhow, whether it is a company or a Limited Liability Partnership, a proper capital and investment structure plans has to be prepared before approaching your potential investor. If it is a private company, shares may be in kind of preference shares, premium equity shares etc. Having a proper capital and legal structure gives you a proper picture of the pre and post investment scenarios and increases the confidence of your investor.
6. Traction and earning history- the scale of measure
There’s no question that traction is widely portrayed as one of the most important factors considered by the investors before putting money into a business. Whether you are a start-up or an established business, revenue generation history is very critical in raising investment. There can be no doubt that the more traction you are able to demonstrate, the more credible you appear. An entrepreneur who pitches an investor without any traction, is likely to be told to come back when they have some.
Now, how do the investors know what is your traction and the revenue generation history? The primary information that he will rely upon is your audited financial statements and books of accounts. So it is very important to record all of your business transaction and report it through your financial statements.
Traction is extremely important to the investors so it needs to be important to you. If you want to raise investment, don’t just tell an investor you have a ‘great idea’, tell them you have a ‘decent history’ too.
7. Know your investor.
Finding and partnering with an investor is like a marriage. Like marriage, business partnering is at the same time intimate, rewarding, and challenging. Thus it is very critical to think deeply before choosing your investment partners. To become successful, both parties need to be committed towards the business, growth and show trust and support whether it is sunshine or thunderstorm. It is advisable to consider the following things if you are looking for an investment partner.
- The investment that he already made and how those businesses are performing
- His expertise in the business
- His business and other key relations and professional qualifications
- Capacity to provide additional investments
- And lastly, his education, and social acceptance
8. Exit and returns offered to investors
Whether your business is a matured one or a start-up, you should state a clear exit plan for your investor. So businesses looking for investors need an exit strategy because investors require it.
In a start-up scenario, the exit strategy is usually designed in such a way that the investor, after a few years, gets a lot more money than what he had initially invested. On the other hand, in the case of established and running businesses, the investors also gets their return as annual profit distribution in addition to the amount that he gets at the time of exit
9. Prepare for due diligence
As entrepreneurs, most of you might already know what is due diligence. This is very critical whether you are looking for raising investment for your start-up or you own a mature business ready for an expansion.
A potential investor might ask for a list of legal documents: Audited financial statements, board meeting minutes, incorporation documents, licensing documents, the top customer’s list, vendor agreements, the ownership structure of the company, tax filing documents, and more. It’s up to your team to compile these in a timely manner.
Being prepared for due diligence can increase the chances of actually getting through the deal, and it could reduce the time consumption for the overall process, that you may get funds sooner. Additionally, being prepared for due diligence helps to boost the confidence of the investor, which will benefit you in negotiating the terms.
10. How will you pitch your business before investors?
Yes, we are now at the point. It is very good that you have a great idea, a team of superheroes, proper plan and structure and a shining performance history. Now the most critical phase starts- Pitching. The pitch deck is a presentation that entrepreneurs put together when seeking a round of financing from investors. You have to convince the investor about your Idea, USP, team and everything through this pitching document or pitching session.
When you are preparing a pitch deck or investor presentation, you should remember the following in your mind.
- The pitch should be Clear and simple– the pitch deck should precisely draw your idea, how it addresses a problem in the market, what are your products and services, team, traction, market, financials and the offer
- Get their attention– Your pitch deck should be able create an interest for the investor. The deck needs to support what you are saying, and don’t make it just a reading material. It is advisable to use charts, images, and graphics and reduce the text to make it more attractive.
- Practice, practice, practice– The best way to make it perfect before your investors is by practicing. Give your presentation to your team, advisors and some other experts and get their feedback. Be open to critics and correct and fine tune your pitching Also it is advisable to prepare an elevator pitch for your initial introduction either as part of a larger pitch or when you’re out networking. Keep it short, simple and memorable such as “The Amazon of China” was for Alibaba.
Final words- Plan, Prepare and Practice
Again as said at the beginning, money is one of the most important factors determining the success of your business, especially if you are in a budding or expansion stage. Whether you are raising 1 million or 10 billion, it is very important to have a structured process to become successful. When you are looking to raise investment, start early and go through the process in a planned manner. Fundraising isn’t easy, but proper planning, preparing and practicing makes the process more efficient for a positive outcome.
Get in touch with the author C.A. Arun Chacko at +91 9446446097 or [email protected] if you have any questions.