Funding - Business Investment

Funding strategy relies heavily on the stage of your business development, but in basic terms is about matching "the right plan" with "the right investor" - i.e. being 'Investor Ready'

It is important when planning a funding strategy to consider the most suitable type of investor. Each type will have their own objectives and "limits" that they will stick to. Investors want ONE thing - to make a return on their money.

Generally companies will go through a number of funding rounds to achieve their strategy - this is driven by the stage they are at and the perceived risk that investors are willing to take. The earlier the stage, the higher the perceived risk and consequently the less money that is available.

To be successful you need to be clear about your funding strategy - otherwise you are likely to get the wrong type of money at the wrong time from the wrong investor on the wrong terms.

How much do you need ?

It is important to understand that money comes with different costs. Cash is cheap, debt is more expensive, equity can be very expensive. Once you sell equity (shares) it can be very expensive to get them back again. The earlier you release equity, the lower your company valuation is likely to be and hence the more equity you are likely to have to release.

Consequently, funding tends to be done in rounds, sufficient for the needs of say 1 year's trading to minimise the 'cost' of equity. But make sure you take more than you need. Raising funding when you are desperate is both difficult and costly.

How many rounds of funding ?

Most companies do 3 to 5 financing rounds prior to an exit (IPO or acquisition):

• The first, or seed funding, is a small one - sources are usually family, friends or business angels. The objective is to get your product to the early stage and prove your concept.
• The second round is a more formal round aimed at getting the product into the market - sources can be further business angel funding, debt funding (certain banks provided Government supported loans or mezzanine products as well) or venture capitalists (VC). The scale of this fund raising is likely to be several times more than the first round.
• A third round, would tend to be from corporate and institutional investors (possibly companies strategic to your success and further VC money). At this stage an exit strategy would also be a requirement of the funding.
• A fourth or fifth round may be similar, possibly including an investment banker

• Larger manufacturing and processing companies can typically consume $10 to $40 million in investment prior to exit

 When should you raise it ?

Before you need it ! Raising finance take time - often more than you think - you should allow at least six months per round (sometimes up to nine months).

Be sure you won't run out of cash. Ensure you choose your bankers carefully at the start. The strength of that relationship is crucial and could be necessary to call upon if financing takes longer than expected.

What are investors looking for ?

When investing they will generally look for:

• a new or improved product or service
• the technical skills
• the creation of intangible assets in the earnings
• marketing and management skills
• financial skills to maintain control
• cashflow generation

What should you look for from investors ?

You will be with the initial investors typically for between 2 and 7 years - so choose carefully. You should be looking for people who have:-

• genuine enthusiasm for your ideas a rapport with you
• understanding of your product / industry and sector experience
• contacts more money if (when) required

You should also think about whether you want an 'active' or a 'passive' investor - generally the earlier the stage, the more 'active' the investor will want to be. VCs usually want the option to be able to appoint a board director or two, and will often 'suggest' appropriate non-executive directors to support the business.

Set out your parameters before you start

Have a clear understanding of how far you are prepared to go in terms of: Shareholding % available Control prepared to relinquish (e.g. board positions)

In the early stages you should be prepared to have to relinquish between 20% and 40% of the company. (There may be significant points resulting from local legisation)

Most investors do NOT want to take control, indeed for some their own constitutions may not allow them to do so. But you must ensure you stay in charge on the board. Between 20% and 40% of the board positions may be allocated to investors - more may be trouble to control. Balance this with the fact though that strong investors can make all the difference.