Raising equity finance
Growing a business can be very capital intensive with many high-growth businesses burning cash even faster than those that are making losses or are insolvent!
Even if you’re experiencing growth, not having sufficient capital can be terminal and is always in the top three reasons for business failures.
Naturally, the shareholders of a business can inject their personal funds to ensure the business has sufficient capital, but sometimes that may not be enough.
An alternative option is to sell some of the shares in the business to outside parties, commonly known as business angels.
Business angels are private individuals who look to invest in high-growth businesses and help them achieve their goals. They are also individuals who can prove invaluable in terms of business knowledge and arranging introductions with useful contacts.
So if you are thinking about approaching business angels to raise equity finance to help grow your business, here are ATN Partnerships' Top 10 Tips:
Have three business plans
Well, OK - only one business plan but also a two-page ‘investment brief’ and a condensed 7-page version that allows business angels to evaluate the opportunity quickly and decide if it is something they would like to discuss further.
Make some sales
Even if you are selling at a loss, sales traction is vital in proving all sorts of aspects of your business plan such as cost of delivery and returns. It also allows a run-through of the entire production/service cycle from customer engagement to final payment.
It is a great piece of due diligence and has a huge bearing on business valuations.
Understand your forecasts
Yes, although you can get professional help from us here at ATN Partnership in preparing your forecasts, an angel invests in you, not us, so you must understand key metrics and underlying drivers.
We can help make sure that your forecasts add up and ‘hang together’ across profit & loss, balance sheet, and cash flow, but they must be your forecasts.
Have an appropriate valuation
Valuing a business in the angel investment world is partly objective and partly subjective. You could also say it’s part science and part art. But you must have a clear, sensible
valuation, properly underpinned by demonstrative calculations and assumptions from the outset.
Unrealistic valuations are one of the main reasons that angel investors walk away.
Have a clear exit
You need to be able to explain how an angel investor will get their money back, when that will be, and the anticipated profit they can expect. This is usually not something that you need to commit to in your plan, but an angel investor will look for you to have a clear understanding of how the value of their investment will be realised.
You would be amazed how many businesses we speak with that simply do not know how much money they want to raise! You need a number and need to be clear on what the money will be spent on. And your forecasts need to back this up!
Does your business qualify for these government-approved schemes? Qualification can make your business proposition extremely attractive to potential investors from a tax point of view - and you can get pre-approval from HMRC if you do qualify.
If there are holes in your management team or if further research is needed that can only be achieved through investment, then flag this in the plan. Asking for funds to help plug certain holes is acceptable - and in any case, any holes will always be uncovered before an investment is made.
Be clear on what role you want the angel investor to play
Getting investment from an angel investor is only part of the process. Some angels seek an active role in the business, and some expect nothing but management accounts and quarterly updates. However, regardless of what an angel investor may want, be clear on what you want from them (other than their money!).
Understand the value add
Far too many business owners refer to selling shares in their business as ‘giving up’ a part of their business. If you crunch the numbers, however, you’ll see that selling a 20% stake in your business would only result in around a 4% loss in the value of your personal stake (at worst!).
And remember - ATN Partnership can help with all of the above, including ensuring your financial forecasts stack up, your business plan is ready to go, and coaching you on presentation and delivery.