By Clive Hyman FCA, Hyman Capital Services
Raising funds can be a massive challenge for an SME. To succeed you need to prepare and plan with care. Here are some questions to ask and steps to take:
- Do you need equity, debt or some of both?
Debt can sometimes be more appropriate than equity; it avoids dilution and can be easier to acquire, which saves time on the project of raising funds, and get on with running the business.
30% equity and 70% debt is good ratio and can make the company easier to manage. It also makes the company more likely to attract further equity investment, as the potential shareholders can see that the management has understood that debt needs to be part of the company’s financing strategy.
- Test your financial model – be tough!
Put your figures into a spreadsheet and test them with a number of different scenarios. This demonstrates that thought has gone into the financial model and you’re prepared for different outcomes. Show the different types of returns from the different sources of capital, cashflow for at least the next 12-18 months, and any dependencies which need to be managed.
- Don’t over value your business
To get a sensible, realistic idea of the value of your company, compare the most recent valuations for transactions in the space. You need a balanced perspective. See what all the values are and pick something in the middle. This will show potential investors that you are being sensible and realistic and are therefore more investable.
- Sources of funding
SME funding is always tough and for startups even more so. If you are looking for finance in the £100 million area see organisations such as Sola Bank and Baldetton Capital. In the £1 – 5 million area, there are lots of EIS/SEIS funds, VCT funds, and plenty of pools of EIS investors. Angel networks, which you’ll find with an internet search, are good for smaller figures. Engaging the services of an expert can make a huge difference as they will have personal contacts with relevant potential funders.
Ask your network for recommendations and introductions, and approach your family and friends. Small amounts add up – and help give you the seed that will attract a bigger fish later.
- Presenting the key information
It is essential to prepare a one-page summary of the opportunity – don’t bombard people with lots of information. Include a summary of the opportunity; what investment is being sought and what kind of business is going to be generated as a result, including a potential return. It must be an accurate summary of the business, be clear, concise and easy to read and understand.
- Making contact
Once you have your list of people to contact work through it methodically – and assume you’ll need to follow up. Preparation is crucial. Do background research to ensure: you’re contacting the right people, that your business is in their sphere of interest, is at the right stage for them, and the amount of funding you want is good fit for them.
Remember: the art of fundraising will require you to interest many potential funders before you get what you want. This is a time-consuming sales project and one where you need to fully understand the numbers (we’ve all seen what can go wrong on Dragons’ Den).
Clive Hyman FCA is founder of Hyman Capital Services