In Part 2 of this article, we looked at understanding how to match sources of funding to your needs and develop a funding plan. In this article we will examine the actual money raising process.
This process typically takes 6 – 9 months. In that time, you will pitch your ideas to a great many people so the first thing to get straight is “What is it you want them to know about you”? This has to be crystal clear. But let’s look more generally at what you need to prepare.
You need to start engaging with potential investors as soon as possible and there are two things you need to do that: 1) an Executive Summary and 2) a Pitch Deck.
The Executive Summary is a one-page document that covers the essence of your business, it’s something you would send to an investor without you being there. It should create curiosity, think of it like a CV. The point of a CV is to get you an interview, the point of the Executive Summary is to get you a meeting with the investor.
The Pitch Deck is a presentation that you use when you have that meeting, when you’re face to face. It should elaborate on the information given in the Executive Summary. It should convince the investor that you know how to make them money! That’s what they care about, they don’t care too much about your product unfortunately.
Below is a framework to follow when creating these:
- What’s the problem you solve and why does it need solving?
- How does your innovation solve it?
- How big is the opportunity?
- What is your business model?
- What traction do you have?
- Who is the team behind it?
- What is you need and what difference will it make?
As you progress with the investor and get into the Due Diligence process you will need to also produce a full business and financial plan, but what is Due Diligence?
This is where the investor checks what you told them is true. Hence, they need detailed proof about IP and company ownership and your plans for developing and crucially growing the business, as without growth there is no ROI. Essentially, they are looking for a reason not to invest so you need to be squeaky clean. Don’t forget to do your own Due Diligence too, you need to be sure of what the investor told you.
If the investment looks like proceeding, make sure you get each investor (there may be more than one) to sign that they are either a “High Net Worth Individual” or a “Sophisticated Investor”. This for your protection. It certifies they knew what they were doing when they invested.
SEIS/EIS are tax incentive schemes for investors in early-stage companies. They are a great deal for investors, so they won’t invest if you don’t qualify. Make sure you have registered for these schemes with HMRC.
Now, what’s your business worth?
There are a number of ways to value a business, from valuation of a similar busines and discounted future revenues to Price/Earnings (P/E) Ratio and existing sales, IP and assets. Unfortunately, none of them are much use if you’re an early-stage company as you probably don’t have sales or profits. In this situation investors use a rule of thumb. They typically equate however much you’re trying to raise to be 20% of the business after the investment. That’s it!
The Term Sheet
Once the investor has decided to invest, they will issue with a Term Sheet. It specifies the deal and will be used to create the legal documents on completion. It is essentially the contract between you and the investor. There are only two aspects of the Term Sheet that investors care about: 1) economic terms and 2) control terms. Make sure you can live with both and NEGOTIATE!
That’s it, your 3-stage guide to raising investment. Good Luck!