Getting Finance For Your Business

Many early stage businesses struggle to raise much needed finance, but often it’s down to a lack of preparation and a lack of knowledge about where to go and how to access it. The Digital Jersey Hub has partnered with Envestors, a UK and Jersey business investment angel network, to provide information for digital start-ups.

What type of finance do you need?

This is the first question and it’s not always as straight forward as it seems. Start-up is where you have a great idea but need some funding to undertake research or create a prototype. Obviously this is the toughest point of your business to get funding and you will need a solid track-record and very well thought out proposition to be successful. Seed funding is where you’ve researched your market and established a working prototype or set of processes for your business, however you haven’t generated any sales yet and need money for marketing, salaries, product development etc. It is still very difficult to persuade anyone to lend to you at this stage and your most likely option is going to be raising finance from contacts, friends and family. Bank loans are an option but will probably have to be secured against your home. There are specialist investment funds and incubators as well as private investors, but they will need a very strong business plan, management team and it will help if you’ve put your own money into it too.

Early stage, once you’ve completed the product and generated some sales, and expansion, are likely to be the points in your business when you’ll be most successful in getting investment, but it is likely to be a longer and more challenging process than many people anticipate.

Where can you look for investment?

Private investors, investor groups (angel networks), investment funds, corporate venturing (where a large corporate invests in smaller strategic ventures), venture capital firms/trusts and for established businesses – the stock market. There is also the option of debt through the form of a bank loans etc.

What are investors looking for?

60% of business plans are rejected by private investors within 30 minutes of review. On average only 2% of applications will be successful.

From you:

• Honesty/transparency
• Good full time management team
• Commitment from you – ie you’re not doing this part time and still doing the day job
• Chemistry – they want to feel they can get on well with you and you’ll listen to feedback
• Determination – Essential in any successful entrepreneur
• Realism – Don’t expect a big salary in the start-up stage

From the Business:

• High returns – goes without saying, but they look for five times their investment in about 3-5 years
• Sales – Investors prefer businesses already generating sales
• High growth potential – Investors like scalable businesses
• Intellectual property – Must be secured with the company
• Market knowledge – Launch a business in a sector you and your management team are familiar with
• Investment Plan – Have a comprehensive business plan with detailed financial forecasts ready
• Exit route – If investors put their money in, they’ll look to get it back in three to five years and then sell it on in some way.

From the Business Plan?

An engaging document – don’t make it boring – and explain why this is better than the hundreds of others they’ll be offered. Be passionate and professional.

Explain:

• What is the market opportunity (ie what problem are you solving?)
• What are you selling?
• Who will buy it?
• How do you divide the market into targeted segments?
• Who are your competitors and why is your product/service better?
• How much will it cost and what will it sell for?
• How will it be promoted and distributed?
• What are the risks and threats? (time to be honest)
• Who is the team behind it (include CVs)
• How much funding do you need?
• How will investors get their money back? (exit routes etc)

And critically… Clear financials showing realistic three to five year monthly forecasts with a best case and worst case scenario.

Finally you need a ‘knock your socks off’ executive summary covering all the key issues. 250 word, one page and two page versions might be needed.

The most common reasons investors reject proposals?

• Lack of skills in the management team ( eg technical team have no commercial experience)
• No track record or proof of concept
• Financial forecasts based on weak assumptions – including non-realistic valuations with no room to compromise, or ludicrous sales assumptions.
• Too complex – most private investors prefer simple ordinary shares not complex deal strcutures.
• Inadequate financial returns
• Not scalable
• Lack of trust – don’t try to be cute with investors  eg seek investment in the UK, but have a separate holding company owning IP rights etc.
• Lack of market awareness
• No clear exit route
• The applicant is a serial dabbler with a couple of other businesses

In your Business Plan definitely don’t say:

“This is a wonderful and exciting opportunity” – Just give the facts.

“There is no competition” – then is there a sufficient market?

“Can you afford not to invest?” – yes you will find they can!

“The product will sell itself” – No they don’t you need good management and a marketing plan.

“Our target market is x million” – but on closer scrutiny – it’s not.

“Our conservative sales forecast triples every year” – 300% growth is not conservative.

Keep it simple, honest and free of hype.

To contact Envestors give Ed Daubeney a call: 01534 705532 or 07797 749 355 or email: ed@envestors.je