You’ve set your mind on raising capital to grow the business. You looked at all the options and an equity investor is what you have set your sights on. The first thing you probably thought of - I need a killer pitch deck and the money will roll in….[play crickets sound now]
There’s a lot to think about, understand, plan and execute when raising equity finance.
What is expected of you?
Some basic definitions
I’m going to attempt to make it as simple as possible:
Investment ready - Let’s think about a cake from a bakery. You wouldn’t want them to package the ingredients and give them to you. I’m sure, if you want to eat immediately, you wouldn’t just want the batter either. As a customer, you are looking for the final product that can be consumed - a baked cake. The same applies to your business. Investors want to see that you have figured out the ingredients (resources) and have somewhat mastered the technique (execution), to bake a cake that will sell. You also know that in order to scale, you need more resources and a cash injection. You are investment ready when you what is required and have a plan to get you to the medium or long term goal.
Investor ready - So you can bake the cake and you have a loyal customers and a robust growth strategy - that’s a great start. The investor wants to get to know a little bit more now. It’s time to take the investor into your kitchen to see how the staff operates and perhaps the cleanliness of the production area. They will then move to look at the numbers - are your margins as sweet as the cakes? Everything you believe makes you investment ready needs to be served to the investor for inspection. This is the proof in the pudding.
Investment - the investor puts money and other resources into your business with the aim of growing the business, resulting in an increased value. So if they sell (exit), they will make a sweet profit.
I hope this has you craving cakes! But let's get into it...this blog will cover Investor readiness. Raising equity funding is hard and it takes a long time. To reduce your frustrations and that of investors, you'll need to get your affairs in order. The process to do this is a rather systematic one - like baking a cake.
What is expected of you?
Once you have gained investor interest, the natural next step is due diligence. Due diligence is the process where investors will get into your business. At different stages, there’s a general consensus that different levels of info should be shared. I would err on the side of caution and suggest full disclosure and transparency and commitment to ensuring the investor is fully informed and prepped when making a decision.
Here are just a few tips:
Create a DD room - depending on the size of your round, it may be worth spending money on a virtual data room that allows you to track information like - who accessed the document, how much time they spent on it, who they shared it with, etc.
Look at all the divisions within your business - everything from strategy to marketing and PR, and gather all the information necessary to make a decision. Depending on your round, the investor will more than likely provide you with a list of documents they required at a minimum.
Create a process for facilitating Q&A and ensure you have team members prepped to answer pertinent questions.
Be sure to share accurate financial records - trading history is important in valuing a business.
Legal and regulatory checkboxes - this is critical. If you require a license to operate,be sure to provide valid licenses. The same goes for other legal matters like employee claims or ongoing lawsuits. Be sure all your company documents and cap table is up-to-date.
If you’re just starting out, start keeping a record of everything - it will take a load off you by the time you get to this point.
Why is this Important?
The primary responsibility of investors and fund managers is to maximise return on investment while minimising risks. The information you provide as part of the DD process will help investors determine areas of growth and red flags to be addressed. You will need to bake in costs for advisors, lawyers, accountants, and tax specialists. If you are in tech - expect to engage relevant experts so be budget for this.
Key takeaways:
Being investor-ready is a minimum to embarking on any fundraising activity. It’s all about backing up your story with evidence.
You can check all the investor readiness boxes, and your deal can still fall through. This shouldn’t deter you from prepping.
Always be prepared!
How can we help you?
To get your over the nerves and help you kick off your efforts to raise a round, we will be running a 3-day investor readiness masterclass where you will get into the mind of the investor to determine what they are looking for under the bonnet. You will find your gaps and discover strategies to close them before investors dig in. To register click here!
Disclaimer
We do not provide accounting, tax, business, or legal advice. The information provided in this guide is for informational purposes only. Before taking action based on any of the provided content, it is recommended that you consult your own professional advisors.