Attracting Investment

The last eighteen months have presented businesses with a number of challenges from the need to plan for uncertain economic times, to the continued pressures around employee attraction and retention. However, despite these challenges, there has been a continued appetite from funders to invest in businesses particularly those in growth areas such as Tech & AI.

But, if you are considering funding where do you start? What is the right model? And how do you make your organisation an attractive proposition to funders? In this article Natasha Volkk, Head of Management Recruitment at Moon Executive Search, explores some of these fundamentals with Jasper Berry, Managing Director & Corporate Broking at WHIreland.

So Jasper, let’s start with the question I get asked the most often by businesses who are looking for funding, how does a business make itself attractive to a funder?

One of the most important things is that the management team must have a well thought out business plan which explains how the business has grown and how it will continue to grow in the future.  

The management team also needs to be balanced. Investors don’t mind a founder with enthusiasm and a real belief in the business, but the founder also needs to be able to demonstrate that the business has distinctive disciplines  i.e. accounting, commercial, marketing, sales etc, and that despite being a Founder that they will listen to the views of others within the management team. Without this balance of views and opinions the business is not going to be attractive to investors.

 The business needs to consider is its’ intellectual property (IP). Investors will want to understand what the IP is and how it is protected i.e. by patents or by being part of a process.

In terms of the financials the numbers need be straight forward - exceptionals, deferred payments and long debtor days will put a lot of investors off. The same applies to the capital structure which needs to be as simple as possible. Business need to avoid different shareholder classes, director’s convertibles and director’s special shares.

Those are the basic principles which start to make a business attractive to investors. 

When to consider funding

Most funders will be looking for evidence of sustainable longevity, growing margins, a track record and a clear path to profitability. If the business has been going for twelve months, the revenues have grown significantly, and it’s profitable, then the business has a good chance of accessing capital, providing it can demonstrate its’ longevity. However, if the business has been going for a year, revenues are growing slowly and it is still loss making, then it is unlikely that the business will be able to access funding.

In addition, the organisation also needs to understand the sector they operate in and the market saturation for that sector. Take, for example, craft drinks – a sector which tends to fade in and out as consumer habits change - if you get your timing right and get ahead of the market, then you’re more likely to get funding. But if you get it wrong, and over the last six months not only have a lot of businesses in this sector been looking for capital but we’ve also reached a stage where production capacity now exceeds distribution capacity, then that is going to affect a business ability to get funding.

Which funding model?

You need to weigh up the different options and go where the cash is. For example, at the moment both PE & VCT firms have cash to deploy, but if you are dealing with VCT or PE investment then you have to accept that the firm may/will want representation on the board, they will hold the business to agreed returns, and the management team will be answerable to the investors.

The flipside is that both VCT and PE firms can be helpful in terms of putting you in touch with customers and providing you with a final exit strategy or enabling a trade sale which might be a better option than coming to the market directly yourself.

If you don’t want to give up control of your company, then the debt route might be a better option providing the business cashflow can support that debt. We are in contact with several firms willing to provide small business with debt at competitive rates and would be happy to introduce you to them.

For a bigger business you may want to consider an IPO. However the process is expensive and takes up considerable management time, it is subject to market swings in sentiment that can affect valuation, or delay and in extreme circumstances cancel a listing. Size is an issue, most fund managers won’t look at an IPO if the business is generating less than £2m in profits.

Preparing for funding

Firstly, you need to consider how much money you need for the next phase of the organisations development and how comfortable you’ll be working with outside shareholders.

Then you need to make sure that the company is in order. For example, if family members are employed as consultants or a different class of equity exists between the founders and the rest of the management team then this can stop the deal from going ahead.  In addition, if any members of the management team have been involved in a business which has previously gone bankrupt then this can affect investor interest.

The business needs to have three years of accounts and make sure that there isn’t any undisclosed borrowing. You also need to be able to detail any physical assets and explain how any IP held actually works.

In addition, your funders will want to talk to the customers, particularly if there is a concentrated list, and anyone involved in the supply chain. If it transpires that the business is built on a single customer contract which is a rolling contract rather than a fixed term, then this may put a funder off.

We would also advise that if a business has any unusual arrangements then the founders/management team need to have the difficult conversations and try and resolve these before they go for funding. However, if the business is profitable it can still attract investment despite these issues, but the value the VCT or PE firm puts on its’ investment will be considerably lower.

Timings

You should never leave a fundraise to the last minute or you will be at the mercy of the market and investors may take advantage of that to secure more preferential valuation terms for their monies. If you are thinking of raising money or can see a requirement for cash, start planning as quickly as you can.

If you are using a broker such as WHIreland you can work on the private process taking roughly 12 weeks, but if you are going out to the market yourself then this process could take much longer. However, once you have a funder interested in the business it will probably take eight weeks to 12 weeks, from offer,  for them to complete their DD and provide you with the investment.

Words of wisdom

Make sure that your forecasts are achievable and that they make sense.  A forecast may look achievable at the outset but when reviewed in more detail it doesn’t make any sense because the management team hasn’t factored in that fact that as the business grows the cost profile also needs to be adjusted – you are going to employ more people, need more IT, upgrade your CRM systems etc.

Try to ensure that everything within the business is transparent and as simple as possible so that when you do get to funding stage there is nothing to trip you up.

Lastly, businesses should remember that the markets are open no matter what you might hear about Brexit and doom and gloom in the UK. There is money out there, feel free to get in touch if you’d like our help.

Jasper, thank you for sharing this clear and comprehensive advice. Great words of wisdom!

Natasha also adds that in addition to requiring a strong management team, one commonality that we find at Moon Executive Search when working with companies who are undertaking a funding round, particularly where they are going to the market directly, is that they often want to supplement the management team with a Non-Executive Director or Chair who has a strong reputation in the City and who can open doors to different funders.

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If you are planning to go through a funding round and would like to confidentially discuss how we might be able to support your senior management team or non-executive director / chair requirements, then please contact Natasha Volkk on +44 (0) 1275 371 200 or natashavolkk@moonexecsearch.com