Businesses trying to attract investors need to have a sales pitch for their company as well as their products.
Banks are generally reluctant to lend to actual small businesses. Instead, they prefer to lend to the individuals who own the businesses, and often want assets such as houses for security. This leaves many businesses needing to woo investors for growth funds.
Paul Dignam, director of business consultants Gibsons, says that when seeking funds too many business owners focus on their product or the technology they are selling rather than why an investor would want to put money into their company.
“You’ve got a better mouse trap that’s going to change the world but don’t come to me seeking investment and tell me about the wonderful mouse trap. Tell me how you’re got to turn it into a business and how it’s going to make money,” Dignam says.
To that end, investors will also want to see an exit plan, showing them how and when they’re going to get their initial investment and profit back. This could involve growing the business to a point where it attracts larger investors, a trade sale such as to a competitor or a sale to private equity.
This should be an exercise the business owner undertakes anyway, as they plan their own eventual exit from the business as part of succession planning. “If you can demonstrate that you have thought of a succession plan then that will probably put you a step ahead of the next 10 guys waiting outside [an investor’s] office,” says Dignam.
Businesses planning to seek investors should prepare what’s known as an information memorandum or a management paper, which shares many elements of a business plan. These detail the company’s products and services, its geographic reach, its management team and its opportunities for growth.
The next step is to prepare supporting financial documentation, which should include a budget for the business and projected cash flow and balance sheet.
Michael Derin of professional services and advisory firm The Azure Group says the financials need to align with the business plan. There’s little point in aiming to expand to the US if none of the potential revenue is included in the supporting financial documentation.
“You need to deliver confidence in your plan, what your strategy is, and ultimately substantiate the return that they’re going to get with that investment,” he says. “That’s where you’re going to get their engagement.”
Derin says many businesses make the mistake of going to market too early, when their information memorandum and supporting financials are not in order. Businesses are often unrealistic about how fast they can grow the business, which can be inconsistent with what they’ve achieved so far.
“That’s going to lose credibility in front of different people and you’ll find it hard to get traction in meetings,” he says. “It’s very hard to go back a second time and get their buy in a second time.
One avenue for businesses trying to raise capital is the Australian Small Scale Offerings Board, which matches entrepreneurs and business owners seeking growth capital with investors.
ASSOB has raised $120 million from 2000 investors over the past five years. The average amount raised by each company was $503,305, with an average investment per individual investor of just $38,023.
Kate Ingham, senior client manager at Alchemy Equities, says ASSOB’s compliance and transparency requirements make offerings on the board appealing to investors.
“It has the elements that investors expect, in that there’s an issuer’s page, they can see how much money’s been raised, they can download an offer document and a video about the matter,” she says.
“It’s what they would expect if they were to invest in the ASX. It’s got elements there that they’re familiar with.”
Businesses also need to decide what sort of investors they want, a silent investor or someone who will be more involved.
Azure’s Michael Derin says many will be better off taking on a commercial investor “who can give you more than just a bit of cash, but might be able to open up a whole lot of channel partners for your products and services”.
“For example, your product or service could be sold to their clients,” he says.