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Raising Capital- What investors need to know?

Posted on December 13, 2011

Graeme Dixon of Route to Funding sets out what investors look for in companies seeking investment and highlights the importance of a business plan.

There are many things investors want to know and it is one of the reasons why a business plan is essential when seeking investment. Most companies we meet do not have an adequate business plan and too many do not have one at all.

Benefits of having a business plan and what needs to be included

  • Investors want to be confident that you can adequately describe your ideas/business proving that you have good communication skills. The following things need to be included;
  • How has the organisation been managed up to now, include quality of the management team;
  • Critical factors such as break even, costs per item and sales per product;
  • May sound obvious to you but you would be surprised. Market data - who will buy your product/service and most importantly; Why? If the investor is not convinced that you understand this, what chance does a potential customer have?
  • Information about the competition. Who are the key competitors and what is their market share? No competitors at all is not a good sign.
  • An action plan. Lovely looking business plans (and strategies!) are great but will the theory be turned into action?

Funding

Investors need to understand how much funding is required, what the money is be used for and what they are buying (fixed assets. intellectual property, fairy dust). An investor will want to know how much money you have invested yourself in the product or service. This can be blood sweat and tears as well as hard cash. They do not want to just fund your life style or to keep your salary topped up.

What the investors need to know

  • How much you want it; how much skin you have in the wheel. You may own 100% of the issued capital in your company. However, you may have spent your entire savings or remortgaged your house in return for 10% of the equity, or risked nothing for 90%. This is a big difference in perceived commitment.
  • Where any other historical investment has come from, who else believed your story, how was it used and did it have positive results?
  • Will their money be enough or will you be knocking on their door again in a year's time? How will further expansion be funded? They also want to know how their investment will grow and how/if it will be diluted by further share issues.
  • The percentage of your company which is on offer and what it is going to cost them. Most people who have watched Dragons Den will realise that the investor will want to know this.
  • Non-monetary requirements. Will you want the investor in your business using their skills, expertise and contacts or do you want them at arms' length, meeting them every couple of months?
  • How are they going to unlock future value in their investment, what will the Return on Investment be and the likely risks of loosing their money.

Your business plan should include this and more. You should have a response to these questions at the ready. Hiding something from them at this stage will just create doubt. When they have a choice of 10 other businesses to invest in you do not need anything to persuade them to go with someone else.

RM2 can recommend the services of Route to Funding who specialise in helping companies to develop strategy to ensure they are Investment or Sale ready. If you need the help of Route to Funding please contact Graeme Dixon at gdixon@routetofunding.co.uk.

 
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