How to get ready for an external investor
When it comes to growing your business, an external investor can be just the accelerant you need to scale with purpose. The right investor can not only provide much-needed funding, they can also open doors to new talent and customers, offer strategic guidance, and support you through operational challenges.
For entrepreneurs who are already putting everything they’ve got into their business, raising investment capital can be a daunting and time-consuming process – fraught with missteps and hurdles that can slow your business down.
The best way to avoid these missteps is to know what to expect well before you begin to reach out to potential investors. Here is our guidance on how you can start your capital raising journey on the right foot.
Getting yourself ready
First, founders need to ensure THEY are ready for the process because capital raising is as much a psychological journey as it is a financial one.
By that, we mean it is critical for business owners to be clear on what they want to achieve from the raise and their long-term vision for their business. It’s important to take time to reflect and look further down the road – are you seeking external investment to maximise your short-term financial outcomes, or are you looking for a long-term partner who can help you take the business to the next level? If it’s the latter, a growth capital investor is a good option to explore.
In a similar vein, founders should also consider their future role in the business. Such as, how much involvement do you want moving forward? Are you still willing to remain involved in the business in a day-to-day management capacity, and if so, for how much longer? The answers to these questions may impact how much you need to raise, how much equity you’re willing to offer in exchange, and the type of investment partner you should seek.
Types of investors
For example, if you’re interested in retaining control of your business, you’ll need to understand the impact of dilution and seek growth capital investors who only want to take a minority stake in your business and support you over the long haul.
These investors provide influence and guidance – without taking over. Private equity funds, on the other hand, will generally be seeking to take control of the business and so may be better suited if you are looking to maximise immediate financial outcomes at the cost of control. You’ll also want to consider the size of the cheques the investor typically writes, the industries in which they typically invest, and importantly, the ways in which the investor can support your business beyond cash. These are some of the reasons why it is important for founders to educate themselves on the various sources of capital available to them and the implications of these differences.
The best advice here is to talk to those who have been through it — including other entrepreneurs, business owners and investors. By understanding the pros and cons of capital raising and seeking out perspectives from those you can trust, you’ll have fewer surprises — and less stress — along the journey.
Getting your business ready
Once a founder is personally ready to begin the capital raising process, attention shifts to ensuring the business is ready to raise funds. A key focus for this stage is being able to effectively articulate your business strategy – including your goals for the business and how you plan to get there. Your strategy does not have to be a complex document or over-engineered pitch presentation; in fact, it can likely fit on one page.
A critical element of your strategy is communicating your financials and ensuring they can stand up to the rigours of external due diligence. You’ll generally need to prepare a current balance sheet and profit & loss statements (P&L) for the previous two years, year-to-date, current year forecast and next year forecast. The P&L should be ‘cleansed’ or normalised to exclude any personal expenses but should also include a market rate salary for yourself. The financials are where most founders should and do end up spending most of their time and energy when preparing to raise capital because the numbers go straight to the value of the business – which is exactly what you’ll be negotiating with investors.
The value of your business is based on the historical and forecast financial data, so any errors in your reporting can impact how much your business is worth and weaken your standing when it comes time to negotiate. A corporate finance advisor, auditor, or internal accountant can be a huge help in cleaning up the P&L, pre-empting any potential issues that might attract unwanted investor attention, and clarifying the true value of the business.
Operational readiness is another core focus for founders at this stage. It’s all about the details, such as ensuring you have properly executed contracts and shareholder agreements, an accurate share register and ownership over your intellectual property, among other tasks. When you’re preparing to raise capital, it’s also an opportune time to consider cleaning up your share register (cap table). You can reduce complexity by buying out passive, difficult, or unsophisticated shareholders and in turn, cut down on the total number of investors to which you need to be accountable. A ‘clean’ cap table is generally more appealing to later stage investors as well.
Another point to remember is that while it may be easier to raise capital when the business is performing well, growth-focused investors do not want to see founders padding the numbers or investing too heavily in short-term profits that aren’t likely to translate to real growth over time. It’s important to maintain the long-term view of your business while you manage your near-term priorities as best you can throughout the raise.
The reality is that raising capital can be a huge distraction to a founder, and while investors like ABGF move quickly (in as little as eight weeks), the time between you starting to prepare for a raise and cash landing in your bank can stretch from nine to 12 months. You need executive support around you so that you can prioritise your time and energy. Again, it’s worth considering a corporate advisor who can help you map out your raise strategy and provide additional counsel and oversight.
The Australian Business Growth Fund™ (ABGF) is an active provider of patient, minority growth capital for Australian businesses with over $2 million in revenue and a proven business model.