Raising investment is about more than finding someone with capital.
Before an investor commits, they need to understand the business, why you are raising money, what the capital will be used for and how their investment could create value.
The better prepared you are before approaching investors, the easier it is to have credible conversations and move through the investment process.
Be clear about why you are raising capital
Start with the most basic question:
What is the money actually for?
“We want £2 million to grow” isn’t enough.
Investors will want to understand how the capital will be deployed and what it should enable the business to achieve.
For example:
- expanding into a new market
- opening additional locations
- recruiting a sales team
- investing in technology
- launching a new product
- making acquisitions
- increasing production capacity
- providing liquidity to existing shareholders
You should be able to clearly connect the capital being raised with the next stage of the company’s development.
Work out how much you actually need
There can be a temptation to raise as much as possible.
Instead, build the requirement from the business plan.
If you are opening three new locations, what will each one cost?
If you are recruiting a team, what will the salary and associated costs be?
How much working capital will you need?
What contingency should be included?
The amount you raise should have a clear rationale behind it.
You also need to consider how long the capital needs to last and whether you expect to raise again in the future.
Get your financial information in order
Investors will want to understand both historic performance and future expectations.
You should have clear information covering:
- historic accounts
- current management accounts
- monthly revenue and profitability
- cash flow
- balance sheet
- budgets
- forecasts
- key financial KPIs
The numbers should tell a consistent story.
If revenue has increased significantly, be prepared to explain why.
If margins have fallen, understand what caused it.
If the forecast assumes rapid growth, be able to show what supports that assumption.
Investors don’t expect every number to be perfect, but they will expect you to understand them.
Build a credible forecast
A forecast should show what you genuinely believe the business can achieve, not simply the numbers you think an investor wants to see.
Investors are likely to challenge the assumptions behind it.
If revenue is expected to grow by 40%, what is driving that growth?
More customers?
Higher prices?
New locations?
A larger sales team?
An acquisition?
The more clearly you can connect the forecast to real operational drivers, the more useful it becomes.
It can also be sensible to understand what the business looks like if growth is slower than planned.
Understand your valuation expectations
If you are raising equity, you need to have a view on what the business is worth.
That valuation determines how much of the company an investor will receive.
For example, if an investor puts £1 million into a business at a £4 million pre-money valuation, the post-money valuation would be £5 million.
In this simplified example, the investor would own 20%.
Don’t choose a valuation simply because it produces the level of dilution you want.
Be prepared to explain how you arrived at it and why an investor should find the proposition attractive at that price.
Know your key metrics
Different businesses will be assessed using different measures.
A SaaS business may focus heavily on recurring revenue, retention and customer acquisition economics.
A services company may be more focused on EBITDA margins, utilisation and customer concentration.
A multi-site business may look at performance by location and the economics of opening new sites.
Know which metrics really drive your business and have the information available to support them.
Understand your customers
Investors are likely to spend considerable time understanding your revenue.
Be ready to explain:
- who your customers are
- why they buy from you
- how you acquire them
- how long they stay
- how much they spend
- whether revenue is recurring
- your largest customer relationships
- customer concentration
- retention or repeat purchase behaviour
Strong revenue growth is attractive, but investors will want to understand the quality behind it.
Get the company paperwork organised
If discussions progress, investors will carry out due diligence.
Preparing early can prevent unnecessary delays later.
Make sure important documents are easy to locate, including company records, shareholder information, employment contracts, customer and supplier agreements, intellectual property documentation, property arrangements and relevant regulatory information.
You don’t need to provide everything at the first meeting.
You do need to know that it exists and can be produced when required.
Think carefully about the investor you want
Not all capital is the same.
Some investors will want an active role in the business. Others will take a more hands-off approach.
Some invest for three to five years. Others may have a much longer time horizon.
Some can provide follow-on capital, industry expertise or introductions that could materially help the company.
Before starting a process, think about what you want from an investor beyond their money.
The relationship could last for years.
Be prepared to talk about the risks
A credible investment case doesn’t pretend that nothing can go wrong.
Investors will want to know what could prevent the company achieving its plan.
That might be customer concentration, recruitment, competition, regulation, supply chain risk or dependence on key individuals.
Know the major risks and explain how you are managing them.
Being realistic about weaknesses is usually more convincing than pretending they don’t exist.
Prepare the management team
If you have a senior management team, investors may want to meet them.
Make sure the people involved understand the fundraising process, the company’s strategy and the plan being presented.
An investor isn’t only investing in financial forecasts.
They are also making a judgement about the people who will be responsible for delivering them.
Look at the business through an investor’s eyes
Before approaching the market, ask yourself:
Why would someone invest in this business?
Then ask the harder question:
Why might they decide not to?
Understanding both sides can help you prepare for the conversations ahead.
You don’t need to remove every weakness before raising capital. Few businesses could.
But you should understand the questions investors are likely to ask and have clear, credible answers.
Find investors on The Brokerage
The Brokerage connects businesses looking to raise capital with investors actively searching for opportunities.
Create your capital raise profile to present your business, explain what you’re looking to fund and connect with investors whose criteria match your opportunity.