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What to know before seeking investor finance

What to know before seeking investor finance

January 6, 2021
Deborah Edwards

Seeking an investor isn’t as easy as simply asking for money to fund your highly promising business idea. It takes serious work, preparation and patience and the chances are you you'll need to kiss a few frogs before you find the right fit. But before all that, here are some things you should know beforehand.

#1. How Much Are You Willing to Give Up?

Most investors only do equity deals. If that’s the case, you have to do two things:

  • Get your company valued
  • Decide how much of your company you’re willing to give away for the money needed.

There is a direct correlation between the value of your business, the amount of money you need and the amount you are willing to give up. Once you understand the maths, you will be able to understand the value of your business and be prepared to justify its valuation, e.g. if you want £200,000 and you are prepared to give away 20% equity, you are effectively valuing your business at £1 million.

#2. The Three Types of Investors

There are commonly three types of investors you can turn to.

Angel Investors

These are often wealthy individuals most interested in early-stage businesses. Angel investors almost always seek to invest in exchange for a portion of the business. In addition, some may also be willing to contribute their expertise.

Venture Capital

Venture capital is an enterprise endeavour, so you’re going to need a VC firm if you want to raise more than one million. While it’s a popular fundraising method for high-growth businesses, it’s not ideal for small companies that don’t hold potential for outsized returns and VC teams will take a very keen interest in the management of your company.

Crowdfunding

Crowdfunding is an interesting alternative. Instead of having one or a small consortium of investors, equity based crowdfunding can attract a pool of sometimes up to a thousand investors who all invest smaller amounts of money. Have a look at crowdcube.com or seedrs.com to find examples of businesses who are making their shares available for investment.

#3. Investor Expectations

You must have a killer business plan before you even think of approaching an investor. People need assurances before they part with their money, so your comprehensive business plan must outline your big idea, evidence that the market exists & why you're the right person to deliver. Include realistic projections and use numbers & other proof to back up your claims. For any investor, one of the most important concerns is how and when they’re going to get their money back, plus returns.

Some investors only put their money in niches they’re familiar with. All of this only means that you have to do your research before going into a meeting and you should ensure that you find out when investors expect to see a return. The most successful investments are when investors and company goals align. If they don't or if they drift from initial promises, relations can get strained.

#4. Health Check Your Finances

Before seeking external funding you should give your business a financial health check. To begin with, you can work on improving your profitability and cash flow and ensure that you’re bleeding too much money and what you can do to fix it. Investors will not want to invest in a leaking bucket. They will want confidence that their money will be used to amplify business results.

#5. Available Tax Reliefs

There are different tax reliefs available for investment in business. Ask your accountant about SEIS and EIS, two generous tax schemes that if your business qualifies, can reduce the risk for investors and make your business more attractive to external investment.

#6. You'll need Professional Support

You'll need professional accountancy and legal support when bringing an investor into the business. You'll need someone who can check over any shareholder agreements and ensure that the paperwork is compliant with HMRC & Companies House. Don't try to scrimp on this part as it will only come back and bite you later on.

Seeking Investments Is About More Than Cost and Convenience

Requesting investor funding is one of the biggest decisions you can make. It can be great for your growth and turnaround, but it can also result in the loss of control and even the business in the longer term. Many brilliant founders are outgrown by their business and your relationship with your own fledgling must lose any emotional attachment.

Make sure that you have all your facts before making a move and that you’re seeking investment for a very valid reason. Once the cash has hit the bank, going back to being focused on delivering your business plan and achieving those goals!