Successfully raising capital is all about researching potential investors and organizing the materials to support your pitch before seeking out an investor who gets your company’s potential. However, it is also important to find an investor who really understands you – who wants to get to know you and who wants to build a relationship that is successful for you both. Obviously, you need to show a potential shareholder that your business is growing – but ultimately, you need to demonstrate passion and knowledge.
Businesses often begin with equity from family or friends to get you started, but once you get beyond that initial spend and have created a product that you think is good enough, it is likely you will need to raise money from professional investors.
Many entrepreneurs get a positive initial response from a potential investor but run into challenges because they can’t immediately deal with the follow-up questions. Before you start approaching investors for initial professional investment, it is important to prepare the following:
Equity Story
Entrepreneurs are great at explaining the benefits of their product or service but less good at explaining to investors why they should invest in them. It feels very risky to open your business up to deep scrutiny by knowledgeable business people. They will want to know why this business is going to make money for themselves and their own investors.
This is your equity story – the reason why you will make money for your future shareholders. You need to give them confidence in you and your company, and familiarise them with the project. Investors are likely to be highly knowledgeable about multiple markets, which will help them to advise you in later stages, but initially they will evaluate you and your plans extremely skeptically.
Market
Investors will try to work out how big the market opportunity is by asking what your Total Addressable Market (TAM) is. They will want to know information regarding your top level market statistics – if your concept is successful, how many people would buy it in the world, and what is its overall value?
Investors will be keen to see if the entrepreneur knows their current market, particularly their international competitors, and if they know how big the potential future market is. They will also be keen to see you demonstrate proof of knowledge of the competitive dynamics as well as your strategy to target incremental markets (and their potential revenues).
Product
Investors will want to know your value proposition – ensure you have a growing revenue base in order to track investments to help demonstrate why a customer should buy your product compared to a competitor. Investors are also interested in your unit economics – the costs of unit sale and delivering the service – and will want to understand all other expenses.
Be ready to outline your quotas and the sales targets you want to earn. Furthermore, investors will be keen to know your strategy for introducing additional markets through a roll out model by country/market.
Create a product road map – this should incorporate a sequence of features as well as the priorities and commercial reasons your product will need additional functionality later on. Investors will hope your product is self-sufficient and that it won’t need additional support. However, if it does need to evolve, the investors will be keen to know what these additional features are, how they are to be delivered and how they can be paid for – and this map will easily demonstrate how these engineering costs will develop in the future.
People
Investors want to have some sense of your passion and ambition, and will be evaluating you to assess your knowledge and skills, and how you work.
Investors will also want to be reassured that you have a complete, expert managerial line-up behind the business. Emphasise how strong the executive team is, and advise on particular credentials of specific members. Fundraising is also a good opportunity to seek out candidates for gaps in the team, such as a Financial Director.
Finance
Investors expect to have transparent financials available immediately, including monthly management reports, a current 12 month rolling P&L forecast, a three-year business plan by quarter, and a 12 month rolling cash flow forecast. This will be a key test in displaying your endurance and ambition to the investor. You won’t be exciting your investors or deemed as ambitious enough if you suggest low growth. However, if it is pitched too high, you will be regarded as unrealistic.
Finding the balance is hard but important, and it is critical to calibrate your business plan towards the specific investors you are pitching to. Integral to all of the above elements is that it is your aspirations and ambitions that are paramount in attracting investors to buy into your business. Ultimately, show why you are worth investing in, and how you are going to make money in future for them (and their shareholders).
Get your admin mechanics right
Store all your important documents in one place online (such as ‘Google docs’), including standard customer contract terms, shareholder agreements, Companies House filings, budgets, financial forecasts and historic management accounts. If you are unable to provide information promptly when potential investors ask, the delay or lack of provision may make them suspicious. Also, ensure your website and blog is correct, fully branded and up to date.
| At Vie Carratt, we help you develop your equity story and prepare you for raising capital. We have many years of investment experience in internet companies in Europe, so we can advise you on how to pitch these expectations, forecasts and plans. Get in touch with us for further information. |