- Investment a short Introduction
- Who to approach for Investment
- Pitching your ideas
- After and beyond
- Over 1,000 listings entries on who to contact and how across different industry sectors.
- What kind of investment is needed
- Who do you pitch to for investment
- How much to ask for?
- Credibility and maximising your chances
- Handling questions and objections
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1.1 WHAT INVESTORS WANT IN RETURN
Careful study of investors' profiles and the businesses in which they have invested recently will give you a clear idea of the niche areas to which they are attracted. It will also indicate the scale and nature of funds they commit to individual enterprises and the equity participation they are looking for. All investors are risk averse to the unfamiliar and if your venture falls outside their broader fields of interest and experience, it is unlikely that you will attract attention.
However, before attempting to identify specific investor targets it is important that you understand the common requirements and preferences that all investors are likely to have so that you may structure your investment proposal and subsequently pitch accordingly. They fall under the following broad categories:
Presentation and initial contact
Pitch and preliminary discussion
Growth and scalability of business
Detailed Business Plans
Risk / reward assessment
Only when the investor is satisfied on all six counts will more detailed discussion take place leading to negotiation of terms and ultimately a Term Sheet to be approved by all parties which will form the basis for detailed documentation and due diligence.
Before discussing the likely structure of any investment deal that may be on offer, let's review in turn each of the six requirements.
Your first objective is simply to attract investors' attention sufficiently so that you are invited to attend a meeting to make your pitch and hold a preliminary discussion. The most effective way to make your approach is an email to the potential investors you have selected enclosing a PDF of your headline Business Plan. Be sure to follow the seasoned advice in David Bateman's book Business Plans that Get Investment; the nub of his advice on constructing your plan is to follow the familiar KISS dictum: "keep it simple, stupid".
As David emphasises, most professional investors receive up to 100 approaches with Business Plans every week and most of these end up in the bin. To gain attention your Plan needs to be clear and concise, delivering its message and your core proposition within the first five minutes of reading which is probably all the time that an investor will give to their first scan. A confused message with a jumble of secondary detail and a lack of structure, however well written, will be fatal to further reading.
The structure which David advocates is a package of no more than 14 pages arranged and titled as follows:
1. Executive Summary – An overview of what is to come.
2. Opportunity – What problem or gap in the market your business addresses.
3. Background – The product your business makes or the service it offers.
4. USP – The Unique Selling Pont (USP) that makes your business special and different from others.
5. Progress – The progress you have made in developing your business and its current position, including any successes to date.
6. The Market – The identity and characteristics of your customers.
7. Route to Market – How you plan to access and sell to your potential customers.
8. Competition – Who else does what you do or something similar.
9. Management – Who runs the business and what is their experience and knowledge of the sector.
10. Business Model – How the business makes money, explaining the manufacturing cost of the product, or provision of the service, through to the proceeds from actual sales.
11. Financials – Current and future sales, costs and profits.
12. Investment – How much investment you are asking for and what you plan to do with it.
13. Exit – How the investor will get their money back from their investment and generate an additional return.
14. Conclusion – A brief synopsis of the plan, similar to the Executive Summary but finishing on a 'high note' with the most favourable points.
For the structure of each page bullet points are recommended with no more than six bullet points on each page including the financials. A template is provided on the website www.businessplansthatgetinvestment.com to which purchasers of the book have access in PowerPoint landscape format as an exemplar for any Business Plan.
When writing your Business Plan, be aware of the criteria that investors who persist in reading beyond the first five minutes will apply. And here it may be helpful to differentiate between the three broad categories of equity investor, not rigidly compartmentalised, who are business angels, venture capitalists and private equity.
All three often, though not always the case with private equity, start out with the general expectation that no more than 30% of their investments will be successful. Therefore, they look for high returns from those that prosper. In venture capital, the rule of thumb is that only 10% are winners.
Most business angels and venture capitalists aim to exit their investments within three to four years. Larger equity funds may take a longer view. However, take four years as the norm for the time period of your planning.
Before clinching a deal you will need to demonstrate 'proof of concept': that your product or service has a market, is commercially viable and will make money.
Angel investors are usually businesspeople who have often started successful businesses which are the basis of their wealth and who favour early stage businesses. They may be keen to offer expertise and experience to the start-ups in which they invest. Individually their personal investment may be a little as £10,000 and is unlikely to exceed £100,000. They tend to hunt in packs through managed networks such as the Oxford Invenstment Opportunity Network (OION), which forms a new investment company each year in which individuals invest as a syndicate to take advantage of the government's Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) offering relief from Capital Gains Tax (CGT). There is a preference by such networks for innovative high-tech businesses. Early investment equity funding by angel consortia is most suitable for companies seeking from £75,000 to £250,000.
Venture capitalists are focused on companies that already have some track record. They are professionally managed investment companies in their own right and are probably more demanding than angel investor syndicates in terms of Business Plans and management team capabilities. They like to offer funding packages in excess of £250,000, which minimize their risk exposure by providing at least part of the investment in loans or most of it in preference shares with only a small proportion as unprotected ordinary share capital.
Private equity funds also encompass the larger investment companies that provide multi-million pound funding and sometimes involve themselves in supporting acquisitions and corporate rescues.
PITCH AND PRELIMINARY DISCUSSION
Your initial pitch was your Business Plan and, if it did its job successfully, it will elicit invitations to meet and discuss. But do not expect that responses will be unsolicited. Prepare yourself for telephone follow-ups after one week to all that have not sent "thank you but no thank you" replies to your email. Verbal follow-ups are of crucial importance.
At your first meeting with a prospective investor expect to be questioned closely on all elements of your Business Plan and prepare accordingly. Have back-up information available as hand-outs but use sparingly, only where there is demand for further detail. However, the face-to-face encounter has more dimensions than cross-examination of the Plan. This is the investor's first opportunity to appraise you personally and any members of your management team who attend with you. As well as satisfying the investor on your plans and your ability to carry them out, this is an opportunity to establish whether there is sufficient compatibility and the confidence to proceed further.
And the dialogue is a two-way street; it's your opportunity to establish a basis of sufficient trust in the investor team for you to feel comfortable in continuing to talk. Before meeting again or exchanging further information you may be asked to sign a mutual non-disclosure agreement (NDA) in order to protect sensitive information or intellectual property of both parties.
GROWTH AND SCALEABILITY OF BUSINESS
Growth can result from general growth of the market in which you operate or from your increasing penetration of the market as a result of your business's USP (Unique Selling Points). Investors will look for evidence of both.
"Scalability" is an attractive and often necessary condition for equity investment. This means that if your company operates in a market niche and has a Business Plan showing geometric growth rates its chances of securing investment are greatly enhanced.
Innovative brilliance, sound business strategy and thorough understanding of the market(s) in which you operate are all strong plus points in assessing management capability. However, they are not enough to convince experienced investors. You will also need to show that your management team has depth and has appropriate 'been there, done that' experience.
Young management teams have an advantage in terms of perceived energy and enthusiasm but you may need to add one or two older members, over 40, in supporting roles such as finance or, perhaps a non-executive Chair with an established reputation and connections. The executive management needs to be full-time without other work engagements. You also need to be aware that, from an investor's viewpoint, 'capability' includes financial commitment. The core management team will be expected to invest significant personal funds for their shareholdings. The terms of the deal may include the provision of loan capital to management for their investments, sometimes secured on their personal assets.
DETAILED BUSINESS PLANS
The financials in the Business Plan that you have sent are headline numbers, confined to revenue, gross profit, net profit and net margins over four years with notes highlighting margins and growth and, maybe, references to bank debt and directors' investment. As discussions progress you and your financial director will be required to provide much more detail in terms of revenue sources, variable costs, gross margins, overheads and cashflow forecasts incorporating all these elements
You need to have this information in your back pocket at the first meeting, but do not provide your spreadsheets until requested. You may find that more detail or projections for alternative scenarios are required.
RISK / REWARD ASSESSMENT
The degree to which an investor is risk averse will affect the decision to go forward and also the structure of any investment package that may be offered. The assessment of the risk/reward involved will be conditioned by past experience of investment in companies in the same or similar fields. The calculated investment return is a key determinant and each investor will have its own yardsticks for measuring the rate of return. An exceptionally high rate of return from an innovative product or service is not necessarily an added inducement; it may raise concerns that your market is vulnerable to new entrants and discounting.
Two of the most common measurement tools are EBITDA and IRR. EBITDA is the acronym for earnings before interest on debt, corporation tax, depreciation and amortisation and the more complex IRR for "internal rate of return". IRR, much favoured by private equity, is the calculated total return over the life of an investment in terms of cash received from dividends and interest plus the cash recovered on exit, net of tax and discounted by the time intervals before receipt (i.e. their present value), expressed as a percentage of the original investment. There are a number of variations on the calculation of IRR which can be found online and Excel has a function to calculate its own variation.
Most investors are looking for an interest in the ordinary share capital or equity of a target company of more than 25% but it is unlikely, except for angel syndicates, that any offer will take the form of a straightforward subscription for Ordinary Shares.
However risk tolerant an investor, they are likely to offer a package which includes either or both of a subscription for Preference Shares (which is another form of equity) and the provision of loan capital in the form of Loan Stock (i.e debt) with conversion rights into equity at the investor's time of choice. The initial investment may include only a relatively small element of ordinary shares with the major part offered in either Preference Shares or Loan Stock with conversion rights into ordinary shares attached. When exercised, they will bring the investor's equity holding up to and perhaps above the level with which you might feel comfortable. In the meantime, voting rights on Preference Shares or Loan Stock restrictions on further debt will give the investor a degree of financial control and limit the downside risk. Of course, both Loan Stock and Preference Shares come with interest charges which will impact profits and the availability of dividends on Ordinary Shares and you should consider carefully the implications of rolled up charges and penalties in the event that the company is unable to pay interest at the due dates.
Most investment packages also come with requirements that executive directors should enter into service agreements. The company may also be required to take out key person insurance, at least for the Chief Executive, providing cover in the event of disability or death during the period of service. As many investments are made to back the key individuals as well as the business, it will be vital for an investor that the key individuals are fully tied into the business and there is a contingency in place should they no longer be able to fulfil their roles.CHAPTER 2
1.2 COMMON MISTAKES TO BE AVOIDED WHEN RAISING INVESTMENT
Eileen Modral, Investment Manager, OION Ltd
Raising investment is a serious part of any business and takes time and effort for both entrepreneur and investors, so preparation is essential. With so many interesting opportunities now in competition for investment it is far easier for any investor to walk away when problems arise. So avoiding simple errors at this stage can be the difference between getting a follow up meeting or not.
For the 24 plus years that Oxford Investment Opportunity Network Ltd has been supporting entrepreneurs and investors the early stage investment sector has evolved, not just through the advancement of technologies but in who, how and why investment happens. From crowdfunding that has enabled new models to evolve but also, as a result of the advancement of tax breaks under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), the sector has flourished.
However, the fundamentals of investing have changed very little: the due diligence and the risk reward balance considered by investors are still basically the same, be they angels or VCs. The size of investment may differ but it takes as much time and money for an investor to make an investment of £5,000,000 as it does of £50,000.
What has also been consistent are the mistakes that entrepreneurs make when setting out and during fundraising. These are many and varied; so what has been set out below is a broad view around areas of timing and due diligence. It is not comprehensive or exhaustive but does cover the most common errors. These mistakes are often interlinked and also impact at the important stage of that first face to face meeting with an investor. Valuing your business is the subject of a further chapter.
Types of funding
There are only three basic funding types: Grant, Equity and Debt. There may be many variations on these three, but grants are usually for early stage companies looking to do research and development of a product to validate the market, building value in the business and reducing risk in preparation for equity investment. However, remember that grants also take time to submit and then deliver and, if it is not part of the core business for the company, then this can be a distraction. For the purposes of this chapter high-risk equity investment is the focus and a quick tour of the timing and due diligence process is set out below.
Remember it is usually more difficult to attract funding when really needed; so always plan well ahead for what, when, how and why. The process usually takes longer and often the company under-estimates how much funding is required.
How to approach investors is important; with so many opportunities passing across an investor's desk how to get past that first email delete or submission archive is critical.(Continues…)
Excerpted from "The Investment Handbook"
Copyright © 2019 David Bateman.
Excerpted by permission of Legend Times Ltd.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword Thomas Hellman, Professor of Entrepreneurship and Innovation, Said Business School, University of Oxford,
Introduction The Editor,
PART ONE - PREPARING TO APPROACH AND MEET INVESTORS,
1.1 What Investors Want in Return Jonathan Reuvid,
1.2 Common Mistakes - an Investor's View Eileen Modral, Investment Manager, OION,
1.3 Valuing Your Business Eileen Modral, Investment Manager, OION,
PART TWO - DIRECTORY OF INVESTORS,
2.1 How to Use the Directory Jonathan Reuvid,
2.2 UK Venture Capital Investors,
2.3 UK Angel Networks,
2.4 US Venture Capital Investors,
2.5 US Angel Networks,
2.6 Rest of World Capital Investors,
2.7 Rest of World Angel Networks,
PART THREE - DOWN THE ROAD,
3.1 What to Do When You Don't Get Funding David Bateman and Jonathan Reuvid,
3.2 Endgame David Bateman,