Contrary to popular belief, becoming an entrepreneur is relatively easy. The hard part is making your business thrive once it’s off the ground – and this is the phase that often requires founders to think about investment.
The newly-released SME Finance Monitor found that six out of ten companies readily admit they know nothing about equity finance. But simply knowing what these avenues are is only half the battle, as entrepreneurs must accurately assess whether the time is right for their business.
In the entrepreneurial community there’s a common misconception that securing investment will be the springboard to scaling and eventual world domination. If your business idea is robust, surely a financial injection will propel you from start-up to unicorn? But deciding to seek funding is a seismic event in your company’s life, and while the billions invested in various companies make great headlines, the often-underreported reality is that the vast majority of young companies fail to secure investment.
Is your business ready to enter into this extensive, often turbulent process? And even if you decide that it is, are you prepared to make a strong enough case?
Timing is everything
Many entrepreneurs mistakenly believe that sooner is always better. But raising capital too early can prove costly, as it’s likely that early stage entrepreneurs will be forced to surrender more equity than they’d first envisaged. Is the extra funding worth relinquishing control over your company’s direction, as well as a sizable portion of profits?
At Central Working we usually advise our members that if they can sustain growth independently for the next six months, they should avoid entering into the funding process and reassess after this period. Your goal should also be to add as much value to your business before going out to investment. This will not only place you in a better negotiating position, it may also entice some of the more seasoned investors to the table.
Connections are key, build your network and don’t take the first offer that may seem right at the time only to wish you waited a few more months. It is not always about money, you need to find the right fit for your business and ensure that the person investing also adds more than just cash. As your business scales this will become more important, and taking cash just for the sake of it will seem a rushed decision. Hindsight is a wonderful thing, and sometimes it is too late to back out once you have already given too much away.
Assess your ambitions
A common trait of entrepreneurism is the desire to be your own boss and blaze your own path. Pursuing funding can infringe on these ambitions, as many investors will – quite rightly – expect a degree of influence on the business’ direction to assure a return on investment.
That said, bringing external financing can have benefits that go beyond the initial capital. Many investors are seasoned entrepreneurs in their own right and can provide invaluable insight. Canny entrepreneurs who have established a robust proof of concept can afford to be selective and opt for investors with a record of success in their specific sector.
Surround yourself with good people, good people are key to any successful company and you need these people to help scale your idea at pace.
Making your case
If you decide to move forward with the investment process, you’ll need to put forward a strong case as to why an investor should see value in your business. This is often a time-consuming affair and can involve extended meetings, presentations and negotiations. Underpinning the entire process will be your business plan, and it’s crucial that you make this document as robust as possible. You need to transform an investor’s leap of faith into a confident step.
The importance of market research can’t be overstated and you should know your customer better than you know your own mother. But don’t copy the market, build your own path and be bold and different. What are they doing now and why do they need you in their life? If you can’t demonstrate this within the safe confines of a business plan then how can investors have faith that you’ll have a handle on your market once you have the means to scale?
Know your exit. It is harsh at times but investors main focus is ROI so you will be pushed to look in other directions but be firm on your business, or your customer. Their sole priority is their money and how much they will get back. So realistically highlight what returns they can expect.
The numbers are the numbers. Make your forecasts believable and you should be able to confidently show potential investors how you’re going to hit those projections. Always give yourself a fall back, under promise and over deliver has done most businesses well and is a good guide for life. In reality, the large majority of growing businesses fail to immediately reach their most optimistic figures. Things never go to plan, but any decent investor will know this. A crystal clear vision and knowledge of the market will demonstrate that you’ve considered your approach carefully.
Above all, keep it simple. If you can’t easily express your vision then it’s going to be impossible to raise money. To clear confusion, find a friend or family member with little to no idea about your sector or technology. If they can grasp your basic business premise then you’re on the right track.
Ultimately only you can decide if seeking funding is right for you. It’s not a decision to take lightly, and even if you commit to pitching your business as a valuable commodity, there are no guarantees that the investor community will agree with you. But earning that valuable capital can turn your promising start-up into a thriving, scalable business. Just make sure that you’re making your case in the right way, at the right time. And I leave you with a final comment. Surround yourself with amazing mentors, they are key! Approach someone you trust or admire and learn from them as they are valuable sounding boards for your business.