There’s no denying that raising private finance changes the dynamics of your business. Which is why it’s important to think about if it is right for you.
Raising money can give you the fuel you need to grow your sales, expand into new markets and make key hires. But it is also a huge undertaking, which requires a lot of preparation, time and effort. We think it’s worth it (we would say that wouldn’t we!) and for some businesses, it’s essential.
But before you get into the nitty gritty world of fundraising, here are the seven things to consider before raising investment.
It might sound counterintuitive to start at the end, but it’s one of the most important considerations when thinking about raising equity investment.
In fact, it’s the first question we ask people at Raising Partners – what is your vision for the business? Do you want to run a business you pass on through generations of your family? Are you planning to sell your business? Do you have global growth and expansion plans?
The answers to these questions will help you decide whether raising investment is right for you. It’ll also help inform which type of equity finance might be most appropriate.
Spoiler alert – all investors want a return, whether that’s through dividends or a liquidity event where they have the opportunity to sell their shares for considerably more than they paid for them. Before you raise any equity funding, you should consider what your exit plan for investors is.
It might be that you wish to exit the business too and sell to another company, private equity fund or list on the stock exchange (IPO), but if you’ve not thought about your personal circumstances and goals in great detail, then at least consider what the options might be for investors and the approximate timeline you’re working toward. Anywhere between 5 and 10 years is very standard, and this can be considerably longer.
Once you have a clear idea of where you want to take the business, we’d recommend mapping out how many rounds of investment it will take you to get there. We know this can seem like guess work, because hey guess what, it is. But it’s worth taking an educated guess at how many rounds of investment you’ll likely need to do over the next 3 years, 5 if possible.
Financial models are critical to achieve this and will help you to plan out some scenarios. Again, this will help you decide which route to funding might be best for you in this round.
Raising investment no matter where you get it from, forces you to look at your business in a different way. You’re no longer only accountable to your customers and your team, but you have a group of investors to report to.
The fundraising process is a great time to up your game when it comes to governance and reporting including building a board. This doesn’t mean you’ll be at the mercy of your investors, or at least we hope not, but if reporting and structure sounds like your worst nightmare, equity fundraising from private investors might not be for you.
Before you start your fundraising journey, it’s worth getting your house in order.
Everything from getting your accounts up to date, to ensuring you have all of your contracts in place with your team, contractors and insurance policies. Going through this process will ensure that you’re working from a clean slate and nothing comes up later down the line in the due diligence process with investors.
This may feel like a big task but trust us, it’s worth the investment in time now!
A detailed, thorough financial model is the most important tool in your arsenal. It’ll give you the clarity and confidence you need to raise investment. We know from personal experience that financial models can seem daunting at first, especially if you’re not from an accountancy or financial background. However they aren’t nearly as bad as they seem and, like most things, once you’ve got one and know how to read/understand, you’ll never want to be without one again!
Financial models should be built in excel (there’s no substitute or software that works better) and have 5 key tabs: A five year profit & loss (P&L), cashflow and balance sheet alongside a drivers tab and an assumptions tab. Your model should be dynamic and you should be able to test assumptions such as “what happens if it costs me more to acquire a customer than I thought?” and “what happens if I don’t raise quite as much money as I need” easily. If any of this sounds like you can’t do any of this yourself, then get a professional to do this for you!
Once you’ve covered all of these points, you’ll be in a much better position to set your investment strategy and work out which route to funding is right for you and your business.
If you’re thinking about raising investment or would like to talk through anything raised in this article in more detail with an investment professional, Raising Partners offer free 20 minute Office Hours sessions here.
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