Whether you are looking to raise an initial round of seed funding or trying to find new funds to grow, raising capital is a full-time and very stressful job. This stress is further compounded for businesses with a short financial runway, or a limited operational timeline rushing to get a new product to market.
There is no getting away from the challenges of the current economic climate, a looming no-deal Brexit and the spotlight thrown on private company valuations following the crisis at Woodford Investment Management earlier this year. These issues are further compounded by high-profile stories such as WeWork and the delay to their IPO following lukewarm investor appetite and concerns over corporate governance.
Henry Hawksberry's damning article published last week and titled 'Is WeWork a fraud?' remarks that the service office provider 'has made it unnecessarily more difficult for genuine entrepreneurs and technology companies to raise capital in the future'.
Fundamentally, good companies will always be able to raise capital in any environment but now, more than ever, SMEs must undertake meticulous preparation before launching a new funding round. Such planning exponentially increases the chances of success as well as reducing the amount of time prospective investors will need to spend on due diligence.
With this in mind, here are our top pieces of advice to help you prepare for your first (or next) round of funding:
Plan enough time to execute an effective fundraising
Fundraising is time consuming and immensely distracting for any founder.
Raising new funding for any private company typically takes several months, but you should plan for delays and events beyond your control.
Make sure your business has enough runway to withstand these delays and you are not forced to accept terms you wouldn’t otherwise be comfortable with.
Choose a time of year that is not interrupted by a major event e.g. Christmas or the summer holidays and ensure your key team members are available to respond quickly to investor due diligence questions.
Research your prospective investors
Who do you want to invest in your business? Start the research process before you need money and build a picture of what they will want to see when you pitch to them.
Take the time to a few dry runs of your presentation and respond to feedback.
Save your preferred investors until you have refined your proposition and will make the best first impression.
Most importantly, don’t take meetings for the sake of it and make the most of your time working in the business during a funding round.
Know your numbers and present accurate P&L and balance sheet forecasts
Make sure your records are in order and your figures stack-up. Nothing will put an investor off more than a management team that is not in command of its numbers. This information will be the cornerstone of any investor due diligence and provide an indication of the likely growth and consequential returns anticipated from the investment.
Most investors will want to see forecasts looking ahead at least 3 years and the model should be easy to follow. Any errors or missing information will only seek to delay the fundraise and cast doubt for a prospective investor.
If you do not have this expertise in-house then outsource the work to an accountancy practice. It will be money well spent and largely define the success of your funding round.
Ask for the RIGHT amount of money
Whilst this might sound simple, asking for the right amount of money is a key part of a successful fundraising process.
Look clearly to your objectives and stage of the business. If you are still trying to prove concept then your valuation will be much lower than if you have a prototype, or better still, proven revenues and profits.
Asking for too much, too early and you risk excessive dilution than you may need to a future date. Conversely, raising too little will leave your business undercapitalised and mean you need to return to investors sooner than you would want.
Prepare a use of funds statement that clearly demonstrates how the new funds will be used and link this back to your forecasts.
Investor pitch and message
Have the most appropriate person in your team lead the elevator pitch, typically the CEO, but ensure that you are able to demonstrate there is a team around you.
The person leading the presentation will become the spotlight but prospective investors will want to be confident that the business is not reliant on the CEO exclusively and other key roles e.g. CFO & CTO are in place, particularly for later stage businesses.
Test your presentation on people with no prior understanding of the company and/ or sector. Most importantly, your presentation and message must be accessible and relatable.
SpringRock Opinion
Focus on your valuation and make sure you are realistic. Suffering dilution is far preferable to failing to raise the money you need. A valuation that is perceived to be too high will lead to protracted negotiations, distract key management and run the risk of an abortive funding round. See WeWork, and others that have aborted this year for reasons of valuation.
Raising new money is particularly challenging in the current climate. Work on your message and make sure you are presenting to the right investors.
Ensure complete accuracy and disclosures on your P&L and balance sheet forecasts. Create a data-room and keep this update as the process develops. Make use of your accountant in the event you do not have this expertise in-house.
Make sure you have a shareholders agreement/ suitable articles of association in place before launching the round. At a minimum it should include basic preemption rights and tag-along provisions. Most investors will ask for this as part of their due diligence and not having it in place will further delay the fundraising process.