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Finance 5 August 2015
Five top tips for pitching to investors
There are three fundamental things that any business must have to be a success ? an idea, the right people and the necessary resources to make it happen. The most important resource of all is cash, with access to finance remaining the top issue for business founders. Unless you are one of the lucky few that has enough cash to get your business off the ground without having to turn to others for help, you?ll need to be aware of what investors are typically interested in and what is likely to turn them off. Below are five key tips to make your pitch as strong as it can be. (1) Be clear on what you need Investment can take many forms. It could be a grant, a form of debt or equity. All have very different characteristics and attributes. The clearer you are about the type of finance you want, and are able to articulate why, the better placed you will be. Given that some forms of finance are repayable over a set period (such as the traditional bank loan), this will have consequences for your growth strategy and cash flow projections compared to an alternative form of finance that is not repayable, such as a government grant or standard equity shares. If you appear unclear on what form of finance you?re looking for it will make you and your business proposition appear less credible. (2) Talk the same language as ?The Money? Ultimately all investors start from the same position ? can I recover my investment and make a sufficient return? This equally applies to banks, angel investors or venture capitalists. How investors judge whether they will recover their cash and make a sufficient return differs wildly depending on the risk that they are taking. Shareholders will want a much larger return on their cash than lenders, as they are taking a greater gamble. What?s more, startups need to understand that investors? perception of risk is likely to be different to that of entrepreneurs. This difference of perception often becomes clear during fundraising negotiations. That?s where a relationship can often fall apart before it has even started. The easiest way for a negotiation to stall is if the founder cannot speak the investor?s language and answer the questions that matter most to them. A broad understanding of phrases such as ?interest cover?, ?weighted average cost of capital?, ?pre-money versus post-money valuation?, ?convertible debt ?, ?shareholders? agreement? and ?pro-rata rights? will help you avoid needlessly losing a potential investor or wrongly turning down a perfectly sound offer. If you?re unclear on any of these phrases, speak to an accountant, as they should be able to assist. (3) Wow your investors Always remember, investors are only human (even bank managers!). Everyone is impressed by a glossy pack and a slick presentation from well-dressed people, so it would be crazy not to spend the necessary time to ensure the way you present your idea is as clear and persuasive as possible. I?m amazed at how many firms?that are seeking funding forget that gaining investment is a competitive process. Quite often investors are evaluating several potential investments. It?s inevitable that investors compare these applicants when reaching a decision. So, avoid submitting the presentation at midnight and don?t forget to review it again the following day. The finer details really do make a difference. (4) Be aware of SEIS and EIS (if you?re raising equity investment from business angels) The SEIS scheme has helped over 1,600 startups raise funding. In fact, 86 per cent of angel investors (generally high-net-worth individuals) say that they always invest via the SEIS and EIS tax incentive schemes, with over half stating that they would not have invested at all without these schemes being in place. Clearly, if these schemes are important to potential investors, they should be important to founders seeking investment. Founders don?t need to know the detailed mechanics of the schemes ? after all, that?s what the tax adviser is for ? but they should at least be aware of the schemes and, ideally, seek pre-approval from HMRC so that they can reassure the potential investor that any investment made will qualify for SEIS or EIS. (5) Keep your investors happy and updated It?s often the case that an early-stage business will need further funding 12-24 months after the initial raise (if not sooner). If you have done a great job of keeping your investors well-informed and provided regular progress updates, the chances are they will be open to investing further cash. You want to avoid having to search for new investors if at all possible. After all, every day dedicated to raising cash is a day that was not spent growing the business. Image: Shutterstock James Richardson is a director at Metric Accountants.