How to attract investment for your business
So, you want to give your fledgling business the wings it needs to soar? Consider these expert tips before you seek an investment.
Business investment step #1: Define what you’re looking for
Before you cast your mind to the type of investment that would benefit your business, consider whether it needs it in the first place.
“Not all businesses need to take on external investment,” says Graham Stephen, founder of Arete Advisors. “For instance, a consultancy or professional services business may not need to take on investment.”
Once you’ve decided that external investment is the route best suited to your business, you have a range of options to consider, including:
- Your immediate network – family and friends
- Angel investors – high net worth individuals willing to invest their personal funds in a start-up
- Venture capitalists – private equity investors who can provide an emerging business the cash injection it needs to realise its high growth potential
- Strategic investors – corporate investors usually with the long-term goal of eventually acquiring the business.
“Each of these serve different purposes and have their own expectations at different stages and for different types of businesses,” says Stephen. Before you dive in with a proposal, flesh out exactly what the investment – if secured – would be used for. “Draw up a plan of how the investment will help grow the business,” he suggests. Find investment jargon intimidating? Here’s a guide to decoding it.
Protect your personal financial security as a business owner with these tips.
Business investment step #2: Know what your investor is looking for
This is twofold, says David Morobe, Executive General Manager: Impact investment of Business Partners Limited, a business loan and equity provider for small and medium businesses. “The skills, experience and industry knowledge of the entrepreneur (or entrepreneurs), and the market need for the business’s products or services, are two of the most important criteria considered when assessing an application for investment financing,” he says.
1. The business
“This includes the product or service’s market acceptability and market size, the gearing of the business, and its ability to exist and grow,” says Morobe. Investors also consider the business’s history, its stage of development, and medium- to long-term profit potential, i.e. sustainability.
Also consider factors beyond the business. How does the market look? Who are your competitors and what challenges do they present to your venture? “Research whether you’re disrupting an existing or entrenched market,” suggests Stephen.
2. The entrepreneur & team
Do you and your team have the business minds and work ethic that investors will feel confident to back financially? Taking on an investment is a great responsibility, so having the right people on your team is important.
“An investor will consider a business owner’s ability to run a successful business, their integrity, drive, vision and appropriate experience,” says Morobe. “Also assess the character, commitment and capability of the team or management before you seek investment,” adds Stephen.
He suggests reviewing your team’s five key strengths and how these will be used to grow the business. “From a team perspective, understand each of your strengths and where you have gaps, and seek to fill these. Part of the investment might actually be used to hire in certain skills,” he points out. Take your cue from these successful businesspeople who reap the benefits of habits they apply to their businesses.
Then, beyond the goal of generating a profit, get to the heart of the ‘why’ of your business. “What motivates you and sustains you to do what you are doing?” Stephen adds.
Business investment step #3: Have an investible idea
As straightforward as it sounds, interrogate your business plan and whether it’s investible. Does it solve a real problem and/or meet a real customer need? “Investors see through ‘hype’,” cautions Stephen. “Ask yourself: ‘What is the problem that my business solves?’”
This is linked to its long-term profitability. Calculate the current and predicted future running costs of the business, and what this means for your short- and long-term revenue. He also suggests sitting with your team and documenting your plan using a simple tool such as the business model canvas for a clear picture of the building blocks of your business.
Don’t forget scalability. “Think about whether your business can grow and generate a return for investors,” he adds. He suggests you ask yourself the following questions:
- “Is the business meeting a short-term or circumstantial problem, or is it solving a long-term need?”
- “Is it conceivable that the business will still be around in five to 10 years?”
Business investment step #4: Come prepared
Investment involves risk, and with a small business it’s no different. You are essentially responsible for someone else’s money or other resources, so to demonstrate your worthiness to a potential business loan provider, Morobe suggests gathering the following documents for your funding application:
- Your business plan, funding requirement, and how the funds will be used.
- Audited or certified financial statements for the past two years (for existing businesses or a business to be purchased)
- Management accounts for the most recent financial year-end to present
- Summarised CVs of all members/partners/shareholders/directors involved in the business
- A list of securities that the members/shareholders/company are willing to offer to reduce the financial risk.
Morobe notes: “As a viability-based investment company, Business Partners Limited doesn’t always require an own contribution, although an own contribution not only shows commitment on the part of the entrepreneur, but provides the basis for a more positive gearing structure for the transaction.”
Looking at taking out a loan? Use this handy online loan repayment calculator to work out your monthly repayments or how much you can afford to borrow.
Business investment step #5: Hold up your end of the deal
Understand ROI expectations
Clear communication is vital from the outset so that you and your investor agree on the expectations from both sides, and can manage these if either foresee them changing. “Be clear on how quickly the shareholder expects you to grow the business,” suggests Stephen. “In the case of a fund, understand where the investor’s money is coming from and what time frame they have to return capital to their investors,” he adds. Morobe shares that the average repayment period of investments from Business Partners Limited is usually limited to five years, with some exceptions for commercial property finance.
Understand reporting expectations
When taking on an investor, you’re entering into a relationship that will demand careful management for both parties to reap the rewards. You’ll be accountable for various aspects of the investment, and be expected to steward the business and capital funds in a responsible, transparent way.
Stephen says you can expect to increase your record-keeping and reporting so investors are kept abreast of the business’s performance. “It is important to keep shareholders up to date on business developments – both positive and negative,” he comments.
Understand management expectations
At board level, Stephen suggests an investor may request that someone sit on your board of directors – preferably someone with experience in the business you are running. This is mutually beneficial; their guidance can help with sound decision-making, leading to ROI, and their network could facilitate further growth for the business.
Have a conversation with your investor about decisions you will be able to make without their sign-off, and ones they’d like to have a say in – then agree on how best they can be informed about these.
The value of connections
Setting up or growing a business is a daunting task, which is why support from mentors and fellow entrepreneurs plays a pivotal role in your success. Stephen suggests creating a support network with these tips:
- Consider shared work spaces, which can be a hub of entrepreneurs.
- Seek out coffee meetings with ex-colleagues or other entrepreneurs who have been where you are and want to give back and support other entrepreneurs. “Sometimes you just need to ask – you’ll be surprised by how many other entrepreneurs are willing to share their experiences,” he says.
- Have a close group of people in your corner who can encourage you, share stories and advise you. Here’s why having a money mentor can be valuable to your finances.
Book a meeting with a financial planner to explore your savings and investment options as a business owner.
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