Having played a key role on both sides of the table - from managing a technology investment fund and evaluating numerous investment opportunities to pitching for investment and supporting many clients in their journey too, I’ve come to recognize a few key aspects that will improve chances of success.
There are many mistakes that can be made in the quest for funding, but understand them, get your house in order and you should significantly improve your appeal and chances of securing that much sought after investment from the right partner / source.
Broadly speaking these fall into a number of categories from planning, time and team to the business plan itself, the product and finally valuation and control.
1. Inadequate preparation.
Today's capital / investment markets require you to get inside the head of the typical investor and deliver a business plan and a business model that meet his or her key concerns. You will be expected to demonstrate that you can ramp up quickly with a team that really understands the target industry. You want to show that your company can generate a sustainable and durable revenue stream that will become profitable in a reasonable period of time.
2. Not understanding that most investors are very, very busy and hate to have time wasted.
Keep it simple and get to the point in your presentations.
3. Scattergun rather than targeted approach to searching for investors.
The search for an investor must be focused on the most likely sources – key support advisors such as those at Alba are well placed and know the Scottish investment landscape and what kind of projects may fit which investors portfolio. Sending your Executive summary out to everyone means you have no control of who sees and in what context. Your ideal investor may overlook because it wasn’t tailored to them or they misinterpreted a key point and didn’t think it was for them. Be selective and structured in approach and control your documentation and how and when its circulated with several future iterations you want to get the right message to the right person at the right time.
4. Failing to understand (and meet) the investor's real needs and objectives.
Knowing who you’re targeting, what interests them and how to grab their attention is key. The common ‘one fits all’ approach to presenting, circulating Exec Summaries etc simply doesn’t give best possible outcome. Be prepared to tweak and tailor your proposition and learn from each and every meeting, further refining your investor pack as you go. Each investor will have their own criteria and requirements, most of them will spend time with you to give you a better appreciation of their process and procedures, listen to them, take it on board and change your pitch and deck accordingly. Hitting the right notes and understanding what interests them is essential to a positive outcome.
5. Being equity sensitive and investor foolish.
It's not just about getting the best financial deal, it's also about learning what other strategic benefits the investor brings to the table. This is often referred to as ‘Smart money’. i.e. What else the investor can bring to the table. Can they introduce you to big ticket customers, suppliers, a network of other receptive investors…or perhaps even be an ideal fit for that skills gap you’ve already highlighted? They may use this leverage to negotiate a better ‘deal’ but lets be honest, is their additional value not worth it? Make sure you at least consider the wider play and not just the equity value.
6. Forgetting that timing is critical.
Don't raise money at the last minute. It will already be too late, and the cost of desperation is very high. The best time to raise money is when you can afford to be patient.
7. Misjudging the time it will take to close a deal.
It will always take longer than you think, and even when you believe the deal is done…here come the legals! Be prepared for an additional 2-3 months of negotiation whilst the legal teams handle the completion. They are there to protect your interests and as such will always look to highlight the risks associated with any equity investment offer. Equally some syndicates, Angels, VC’s have well managed, tried and tested contracts that they are unlikely to deviate from. So if you find yourself in a position where an offer is on the table, do make sure you understand the caveats and commitments you’re making to your investor in the contract!
8. Spending all your time raising the money and forgetting to run the business along the way.
Arguably one of the trickiest challenges. They say ‘time is money’ and in the fundraising arena ‘money takes time’ – a lot of it! If not very careful it will usurp all of your time, focus and attention and can often be to the detriment of the core business. Is a fine balancing act, if you have a team on board let them support you in what ever way they can. You need to spend time on the fundraising but make sure it’s not to the detriment of the business. If an investor likes you on first meet, several months later you’re closing in on the deal they will undoubtedly ask and expect to see the business has made significant progress over the period of negotiation – if you said you would achieve something and you haven’t…it could effect the deal. So do try and remain as focused on the business as you are on raising the funds to secure its future – yes this is an almost impossible ask…so don’t be afraid to get help – the Scottish start up and entrepreneurial support eco system is fantastic and genuinely like no other, use it!
9. Failing to recognise that the strength of the management team really matters to investors.
Know your limitations, strengths and weaknesses and be prepared to expand your team (and that doesn’t always mean more cost) its an unfortunate reality but the team that starts the journey will not necessarily be the same one that takes it over the line, this goes for the investment round too! If you have gaps be honest and highlight them, chances are the investor already sees these and may even have some contacts, connections to help, or be willing to invest on basis of securing the right resources. Don’t think you can take on the world without support!
10. Falling in love (with your business plan).
It’s so easy to get tunnel vision and ‘fall in love’ with your own plan, after all it is everything to you. But beware - this can create inflexibility, defensiveness and ultimately kill a deal. The investor is investing in you as much as they are the business. They need to know you are receptive and willing to take on their ideas and that you are the right person to lead the business. Knowing what your shortfalls are, where the gaps exist and being willing to ‘surround yourself with people better than you at what they do’ is key to a successful startup. Take on board the feedback and adapt the plan accordingly. Don’t get carried away, be true to your core values but don’t let your ‘love’ lead your business decisions!
11. Providing plans that are all about the product and not about the business.
Investors are buying into the business not your proposition so be careful not to sell them your product / solution. They will of course have an interest but expect you to be the expert and know the market, they want to know more about the business and how it will operate and make money, not the finer detail and complexities of your creation.
12. Providing business plans that are four inches thick.
Size really does matter and shorter is better. Be prepared to have multiple presentations in different lengths--the one pager, the two-pager and the full plan. The investment will not be predicated on the weight of your documented plan – keep it simple, real and to the point.
13. Taking your projections too seriously.
Forecasts are called such for a reason, they cannot and will never be set in stone. So whilst you may believe your own ambitions are realistic, or perhaps in some cases over optimistic, be prepared to have them challenged. All to often you will be told – these are too ambitious and naïve or these aren’t ambitious enough. Again, listen and respond with integrity and credibility. In reality any start up forecasts that predict 4 years in advance (which is roughly what an investor expects to see) will change within the first 6-12 months anyway! Consider alternatives, scenarios and impact of landing the big whale or seriously underachieving. Put them into the plan to show what impact that could have, this is often a constructive way to accommodate the ‘not aggressive enough’ or ‘simply unrealistic’ comments
14. Confusing product development with the need for real sales and real customers.
Product or ‘functionality’ frenzy as it’s often referred to. Its all very well to be a product or industry expert, but you are one person / one organization. Have you really got potential customers interested, have you listened to them and are they close to committing to you and the business? If not think long and hard about what you’re doing. Over engineering your proposition could be costly. You may have the best solution in the world…but nobody is willing or ready to buy it, you find yourself creating a market not filling a gap in the existing market. By staying close to customers and speaking to them from the outset you will not only get great insight but also likely have your first customers lined up before your proposition is even launched. Investors want to see this so please don’t confuse product development with need for tangible evidence proving there is a customer base and sales to be closed!
15. Being so paranoid that you don't tell anyone about your idea.
You can't sell if you don't tell. It’s all very well to want to protect your idea but the only way you will get investment or customers is to speak to people about it. All too often start ups think their proposition is an international trade secret and as such never actually get it to market for fear the idea will be copied or stolen…well guess what, someone else beat you to it because they were engaging with the market, making friends and warming their prospective investors and customers. Don’t be so afraid to share, be sensible of course but stop keeping secrets!
VALUATION AND CONTROL
16. Not recognizing that valuation of small companies is an art, not a science.
Be ready to negotiate as best you can, depending on your negotiating leverage. Startups are notoriously hard to value and everyone will have their own view and opinion. Most investors will also have their own model too…and rarely are any two the same! So be prepared to negotiate, have confidence in your valuation only if you can credibly evidence and prove its worth. Looking to other deals of a similar nature, considering any tangible asset value (IP etc) is always going to be stronger than ‘look at the future revenues’ - they simply show what you may be worth in the future (and again I highlight these will always change) not what the business is worth here and now!
17. Believing that ownership equals control.
An investor can have 10% of the ownership and 90% of the control (and vice versa) depending on how the deal is negotiated and structured. Make sure you are clear on what you need, want and how much control you are willing to share. In some cases this is not a major issue. I reiterate be true to yourself and what your strengths are, if the business may have greater chance of success with another team at the helm and you playing your key role with focus on your primary area of value and expertise…is that not worth considering?
Vivolution is a management consultancy in Glasgow with focus being placed on supporting companies who have aspirations of revolutionising the healthtech, fintech and digital industry. Read more about what type of businesses we work with on our sectors page.