Tim Haggard of My Bookkeeping Online gives his top 12 tips for start-ups looking to attract investment
Attracting investors is an incredibly difficult and time-consuming process. This is especially true for new businesses, because they lack trade history. But here are a few recommendations intended to help.
- For small amounts - consider friends and family. They remain the simplest way to secure investment. They know you and will hopefully trust and believe in you, which is a key starting point in any worthwhile relationship. To prevent fall-outs later, if things do not work out as planned, set out the main points of the agreement in a legal document, signed by both parties.
- Look at things from the investor's point of view. Anticipate what they are likely to think about certain scenarios and make sure their likely questions will not expose flaws in your thinking. If they do, heed their warnings and revise your thinking.
- Value your business sensibly. Credible investors will quickly be put off if you value your fledgling business too highly, especially as there are no guarantees things will pan out as you hope. At the same time, don't give away too much in the rush to secure funds. Crunch the numbers and keep your figures realistic.
- Make sure your plans enable investors to make money. This will be their overwhelming motivation. They are likely to want to see a healthy return on their investment within three years. You need to show how this can happen.
- Have a credible business plan. It is vital if you want to be taken seriously by a credible investor. The key points of the plan are set out in the executive summary, of course. Investors are busy people, so they'll look at the summary's key points and headline numbers first. If this doesn't make a compelling case for investment, forget it.
Also include a detailed list of assumptions in an Appendix at the back of your business plan. They provide clarity for the investor, while compiling them forces you to take a detailed look at all your numbers and assumptions. Responses to each assumption must be well thought out and therefore defendable when quizzed by a potential investor.
- Spend enough time on your financial forecasts. Obviously, these will be set out in your business plan. Otherwise, they should be set out professionally in a spreadsheet such as Excel. At the very least, you will need a profit and loss account, balance sheet and cash flow statement. If you are seeking a modest amount of money, you might get away with just a cash flow statement. Do a month-by-month forecast for at least the first year. It enables you to factor in any seasonality. Also include detailed annual forecasts for years two and three.
- Always ask for enough money. Investors will want to know you won't be back asking for more cash in a few months' time. You must be able to show you have assessed your finances and circumstances properly by accurately working out your investment needs.
- Provide investors with an exit. They will want to know when and how they are going to get their money back.
- Look at registering for the HMRC Enterprise Investment Scheme. There are good tax incentives investors can take advantage of.
- Do your research and act professionally. Find out about investors before you meet them. Focus on why they would want to invest in your business. Be polite, informed and credible. Investors invest in owners as much as businesses, so they will need to be confident in your abilities and feel comfortable they can deal with you going forward.
- Know your weaknesses. Everyone has them, so be honest and provide a viable solution to ensure they do not seriously harm or hinder the business.
- Be passionate. You will probably have to work much harder than you imagine to make the business work. The investor will be looking for assurance you are ready to stick with it - through thick and thin.
Written by Tim Haggard of My Bookkeeping Online.