This is the third and final part in the introductory series to Funding Your Enterprise.

Part One addressed the main reasons why people seek to raise business funding, which summarise as:

  • FAILURE: seeking validation through funding while the fundamentals of a viable business remain lacking
  • START-UP: the bare minimum funds required to create early commercial reality.
  • REFINEMENT & DEVELOPMENT: money to exploit emergent opportunities and to fund essential equipment and activities.
  • TRADING GAP: less important in service industries than in manufacturing (but still very relevant if you have staff), cash to bridge between selling and being paid.
     

Part Two discussed in detail the various sources of investment, which summarise as:

  • SWEAT EQUITY: working for nothing to get thing going.
  • SAVINGS: having a modest sum to kick things off.
  • FAMILY & FRIENDS: a high risk commitment from those nearest to you to get you on your way.
  • GRANTS: various pots of “free” money which can help with particular areas, like first staff or investment in new technology.
  • LOANS: bank finance, which was always risky and difficult to obtain and which is now harder than ever to find.
  • OVERDRAFTS: squeezing your credit lines, which is very risky unless you can enjoy swift and assured growth.
  • EQUITY: more substantial sums of money invested in your business by individuals or institutions in the hope of mid to longer-term returns.

This third and final part of this introductory series looks at two additional areas – the questions you need to ask of yourself and the kind of things you need to know about any potential funder.
 

WHAT YOU NEED TO ASK YOURSELF:

First of all you need to be very aware that only very few young businesses are viable prospects for investment. They need to have:

1. The ability to reach reasonable scale relatively quickly and the need to achieve profitability within a reasonable time.

2. The ability to show enough differentiation and marketplace presence to either fend off existing competition or carve out a new niche.

3. Some strong indications that the founder – that’s you – has great understanding of this area and, preferably either strong direct experience or strongly transferable experience.

4. The ability to provide either repayment cover for a lender or to create sufficient value within the business for an investor to be able to exit either by way of buy-out or a full sale of the business.

- These are searching criteria indeed and help explain the very high attrition around business start-ups. Translated through into specific questions, if you feel that you need investment, you need to be asking yourself:

1. Where is the value (sustainable and unique money generation) going to come from in this? Is it from the establishment of strong and differentiated activities/processes in a sustainable marketplace (absolutely essential for investment prospects), or is it just me selling myself (you might be able to raise loans but very few people are going invest in an individual’s job creation)?

2. How am I going to sell my offering and develop my customer base? Just saying that there a lot of people out there who buy this kind of thing is nowhere near enough. Being able to find custom is the second stage at which most investment dreams evaporate.

3. What do I want money for? Is it because I want money to be able to travel around and eat and stay places and set myself with the trappings of business? Or is it for highly tangible things like travelling to meet with the sales prospects I have already found, obtaining the insurance I need to put on the training seminar I have already arranged, or having the prototypes built for the prospective customers who have specified the product they would be interested in buying? If your desire is of the former, general yearning category, forget it – your plans are nowhere near crisp enough and you have failed to put in the preparatory groundwork.

- A very common tendency amongst business start-ups is to fall into the trap of pinning everything on “if only” and on “it’s very hard”. Remember – your business plans are your own and are 100% your own responsibility. If they rely on too many external contingencies and the road ahead appears far too rocky, then you are embarked on the wrong journey. 

WHAT YOU NEED TO KNOW ABOUT POTENTIAL FUNDERS

Here are some of the very clear ground rules you need to know:

1. Be aware that there are many people out there who will try to dress up personal loans, secured and unsecured (or mortgages), as business finance – there are many websites devoted to this. If it is loan finance you want – and you need to be very sure that your small enterprise can support any loan repayments at this stage – you can seek it direct from your existing or other lenders.

2. There are also many chancers out there seeking to make a market in private investors when they have few contacts and little influence. Never send your business ideas off “blind” to anyone. If you think there is any credibility in the intermediary you are talking to, tell them that you would be more comfortable if they set up a three-way meeting with any investors they had in mind. This kind of request will rapidly sort out the chancers from the credibly connected.
For example, some of the mid to larger-sized regional accountancy practices, particularly the big city independents, have active and effective corporate finance partners. Talk to some of them and if you continue to encounter multiple set-backs, reconsider the realities of your own proposition.

3. Never submit your idea, particularly if it is not reliant on some deeply embedded, protected and inaccessible Intellectual Property, to some kind of public investment panel forum. The risk and exposure through such circuses is entirely at your potential expense. There have been many such copycat events in the last couple of years and I have seen several examples where the intent is blatantly the extraction of participation fees from naïve investment hopefuls. Remember very clearly also that the best investment arrangements are much more of a co-creative nature than these kind of high pressure panels, where embarrassment, humiliation and mutual hostilities are whipped up for public entertainment. This kind of activity has begun to establish a very false image of how corporate finance ideally works.
 

- You can break your heart and break the energy in your fledgling business talking to the wrong people, even if you are yourself a genuine candidate. 

This is how the above points translate through into actions:

If you have asked all the right questions of yourself and feel you have a viable business investment, make a very clear business plan without any wild claims of certain or fantastical growth.

  • Be aware that money has a cost and an investment will only work if both parties can see value. Be realistic about valuations and risk. In many cases, no early stage investor is going to want anything less than c.30% of the action and possibly more. Everyone needs to be real from the outset
  • Pick out the local sophisticated networks that have attracted key players in your local and regional economy – these are far removed from business-to-business events where everyone is trying to sell each other office equipment and services.
  • Identify the local professionals – accountants and solicitors – who actively do investment deals.
  • Research local companies who are comparable to but not competitive with yourself and who have announced investment in recent years – and seek their advice.
  • Have a developed relationship with your local chamber of commerce. Whilst they might sometimes not be the best direct source of knowledge, the information, the advice and the investment you seek will be present somewhere within the wider chamber network.

To conclude this basic overview of Funding Your Enterprise, everything I have said can be distilled down into three points:

1. Be absolutely truthful, clear and convincing in why you need investment, not least to yourself.

2. Be absolutely truthful, clear and convincing in how substantial value (which must be embedded in processes and relationships above and beyond your own daily service delivery) can be created and, just as importantly, realised.

3. Be determined and focused in locating investment. And be absolutely aware that good projects, by and large, will sooner or later acquire exactly the funding that they deserve. The open market can be hard and cut throat but is also a remarkably good judge of value. If you continue to struggle for investment, be ruthless in your own reassessment of both your proposition and your presentation.
 

Good luck. No-one ever said growing great businesses was easy.