Oxford Foundry Start-Up School
Financing your Business
When can I say that my venture is ‘investment-ready’?
Investment-Readiness covers a broad range of areas of your business to consider in preparing to access equity investment. The core elements that you need to feel you have covered before going out to meet investors include the following:
You and your team:
Can you and your fellow founders demonstrate experience or skills in the sector or area that your business is addressing? or are you looking to use the investment to fill gaps
Product/service development
How far have you proved the viability of your business idea
Do you have a working product or a demonstrator?
Have you tested out the business model with your target potential customers-
Do you have users or followers
Have you tested out whether users/customers want it/need it, or prepared to pay a price for it?
Market fit
Have you developed this business to address a need or problem or gap in the market?
Are you clear on the size of this gap/need ? and what part of the target market you could reach?
Competitors
Do you know who are your competitors and have a clear idea of how you compare and how your business positively differentiates from them?
Competitive position- IP
Have you identified your core intellectual property .
What steps do you need to take to protect your IP? This could be part of your investment request.
Do you have first mover advantage?
Innovative/disruptive?
Can you demonstrate /provide evidence of how far your product/service is new and innovative ?
Or can you show it is capable of disrupting the market/sector
Is it scaleable?
Can you identify how you could scale your business – this could be by market or geography or by acquisition?
Finance and Investment
Have you developed an initial budget and forecasts of 2-5 years when you foresee you will have sales/revenue and when you might break even- is it realistic and show how you will grow ?
Investment Needs
Can you clearly identify how much investment you need now and over the next year to 18 months
Do you know what you will spend the equity investment on to establish and grow the business
Valuation
How much equity are you prepared to give away to your investors in the early stage? – and can you justify how you have valued your business and what return you think you can offer over time?
Exit
Have you identified how you will exit and have you looked at other comparable scenarios in your sector/area in terms of acquisitions or IPOs – are these realistic scenarios? Bearing in mind these are merely indicators at this stage.
Finally_ Have you got your Investment ready toolkit ready?
- A one minute pitch- elevator
- A 7-10 minute pitch with a powerpoint deck including all of the above
- An executive summary
- An investment proposal – this is your business plan set out so that an investor can easily identify the investment opportunity
What 3 or 4 things do I need to be able to demonstrate to potential investors, and how do I do this?
Of the above core elements:
Great Team– Can you show that you have the core skills, understanding and commitment to build a business to exit?
Capacity to Scale – Can you demonstrate that your business model can be scaled and that you can bring investors 10x return
Value Proposition-Can you demonstrate that your business model can be scaled and that you can bring investors 10x return
What are some advantages of angel funding over, say venture capital?
- Angels take their own decisions and use their own financial capacity, whilst VCs are investing other people’s money to make a return
- They usually take ordinary shares, unlike VCs who take preference shares so they invest on the same terms as the founders as shared risk and thus more closely aligned to the founders.
- Angels normally do not take large amounts of equity between 10-20% is normal since they know that entrepreneurs need to be in control and incentivised – and will need to give away more equity when taking on VC funding.
- Angels bring “smart money”. They have often been entrepreneurs or been involved in growing a business and understand the challenges, and can bring industry experience, strategic advice, introductions to customers and networks
- Average Angel Deal: £30-50k as an individual. However they usually invest as a syndicate so they can bring sums of £100k to £2m as a first round. If you need more money than that for your first round, you will need to consider VC funding
- Angels are prepared to do follow-on funding and as a syndicate can generally mobilise a number of rounds to take the business through r Series A
- Angels typically co-invest to build the deal including with VCs, Grants and Crowdfunding
- Angels bring patient capital and do not seek to set a short deadline to exit . They will generally work with a business to ensure any exit is carefully planned and at the right time, but are prepared to wait 8-10 as necessary
Where are some good places to begin looking for funding opportunities?
- You need to kiss a lot of frogs!
- UKBAA Member Directory is free to use and searchable by sector, region, stage, amount
- Try to get slots at pitching and showcasing events- direct and online-see UKBAA online event calendar
- Warm introductions are generally best so use your personal contacts, networks; accountant, advisers
- Speak with other invested entrepreneurs (who are not your competitors) about their investors to intro you
- Attend investment conferences on industry/sectors where you can network
- Do your research on recent investments: Crunch base; pitchbook so you can know who is investing in your sector/geography
- Remember it can take 3 – 6 months to find and secure investment, so plan ahead for your investment strategy.
What are some key things to consider when negotiating terms with investors?
Be flexible: This is especially important in relation to your valuation. Investors will have strong ideas about how much they are willing to and they know they can generally find another similar business, so they will walk away if you cannot be prepared to review and adjust.
Be efficient: Ensure you attend calls/meetings on time. Ensure you can respond rapidly and effectively to the Investors’ information requests. Ensure you have all the evidence and information that backs up your pitch: company information; legal information; financial spreadsheets ; market research; detailed information on the technologies you are using/developing etc. Ideally set it all up in an online folder so that it can be easily accessed.
Be aware of the sticking points: Identify where the investors may have doubts about your business or capacity to achieve key developments/milestones in the time stated etc. Prepare further relevant evidence or data or testimonials etc to support your claims and provide reassurance .
Be honest and transparent: do not make claims that you cannot substantiate. Investors will see through these and will not feel that they can trust you with their money. Admit is there have been issues in growing your business or where there are challenges or gaps and explain how you plan to address these – and how their investment and support can help.
What are some classic pitfalls to avoid?
Make sure you ask for the investment you need– Don’t ask for too little or assume you should ask less to be “nice” to investors. Always be clear and accurate on what investment you need. Otherwise you may reduce confidence in you capacity to achieve your development and growth plan or even lacking ambition.
Don’t ask for more than you need – Investors will look for you to justify your investment needs you will have to meet significant performance expectations to not disappoint your investors from providing further investment – and this can put huge pressure on you and your team
Don’t’ undersell yourself- make sure you clearly state all that you have achieved in developing your business to date – this will show your commitment and capacity to execute on the plan . Don’t’ oversell yourself either by making claims about what you have achieved or will achieve that you cannot substantiate.
Don’t claim that your product /service/technology is unique and that you have no competitors- there will always be competition or something comparable and you need to show that you understand it and can build a competitive defensible position.
Don’t accept money from the wrong investors- ensure you do your due diligence on your investors, check out who they have invested in already; speak with entrepreneurs they have invested in to understand what added value they bring; if its a syndicate, check who will be the lead investor in your business- and would you be prepared to take advice from them? – remember it’s like a marriage – it could be a long term relationship!