In this section we focus on approaching an investor for equity finance. A similar page about loan finance is here.
When an investor provides equity finance they buy shares in the company and become a shareholder. Frequently they will provide loan finance alongside this, often without requiring assets as security. Raising equity type finance will usually enable you to raise more money than from conventional sources, which means that you will be able grow faster or undertake a project that otherwise would not be possible. Whilst there are many benefits of this type of finance you must be willing to sell part of the business to an external shareholder.
Before asking an equity investor for finance it is a good idea to make sure that you are in position to answer their questions and provide the information that they are likely to ask for. Most investors will want to be convinced that:
- you and your management team have the right skills and experience to run the business successfully
- your business has a unique selling proposition and strong growth prospects
Unlike commercial loans, the availability of business or personal assets as security is usually less important to an investor.
You may wish to consider the following questions before approaching an investor.
Do you want an investor involved in your business?
Different investors have different approaches – some will want more involvement in your business than others. UK Steel Enterprise will not want to become involved in the management of your business. That’s not our role. However, some equity investors will and may want to make appointments to your board. It is important that you are comfortable with the approach and philosophy of an investor.
What stake will an investor require?
Investors vary. Some larger private equity institutions investing in large companies do sometimes want control, but most equity investors will seek a minority stake, leaving control with the existing shareholders. Some may want a significant stake of 30-49% but others, such as UK Steel Enterprise, will be willing to accept smaller stakes, leaving existing owners in firm control.
Can you demonstrate that you have the right management skills?
Investors back people first and foremost and they want to ensure that your business has a strong management team that has all the key skills it needs to operate successfully. Do you or your team have the required experience in the key areas of operations, finance and sales? Will you be able to answer questions in each of these areas? In some cases, particularly in young businesses, the management team may just be you. That’s fine so long as you can talk knowledgeably about all aspects of the business even if in some cases you rely on outside help for some of these skills.
Do you have a strong business plan?
Make sure it is also concise and realistic and that it identifies the key risks associated with your plans. It should explain your business in clear terms, avoiding jargon wherever possible.
Do you know your business plan and can you justify everything in it?
There isn’t a problem in getting professional help to pull your business plan together, but make sure that it’s your plan, that you understand it and have ownership of it.
Can you identify what sets your business apart from everyone else in the market?
Make sure you can readily identify the unique selling points for your business – why would somebody come to you over your competitors?
Do you know your market?
The size of your market and your projected market share can be useful information but what a funder really wants to know is where your actual sales are going to come from. How do you attract sales? Who are your customers? Do you have a good and rising order-book? Who are your competitors? What will stop you achieving the sales you are forecasting?
Is your product or service fully developed and tested in the market?
An investor generally needs to see evidence that your product or service will sell, preferably that you are generating sales already. Can you identify where your sales growth will come from? If there is still work to be done in this respect, you may need to fund this development work yourself, or with the assistance of a specialist proof-of-concept funder.
Can you identify what you want to use the requested funds for?
Be clear as to how the funds will be spent and how they will help you grow your business. Don’t be afraid to build in some contingency as things rarely go exactly as planned.
Do you have good financial information including projections?
Investors will want to understand your past performance and see up to date accounts, preferably monthly management accounts. They will also require projected profit & loss, cash flow and balance sheets. P&L and cash flow projections should be monthly for at least the first year (longer if the peak cash requirement is later). Investors are more likely to be interested in how fast you can grow but make sure that you can justify your forecasts.