Last month we talked about how as an entrepreneur, you will at some stage think about an exit strategy, but that it might be the furthest thing from your mind during those early days setting up and growing the business. Raising money, however, is likely to be something that's at the front of your mind either from the start or certainly within the first few years.
Raising investment doesn’t have to be difficult and once you know how much you want to raise and how you want people to invest in your business, you can take different routes that suit your needs. But whether you chose to crowdfund, or take the VC or angel route, you need to think ahead about how best to prepare for taking on equity finance.
Investors are not just ‘the money’, but your brand advocates, business contacts, potential customers, and partners, so keep them happy and engaged.
Timing is probably the first thing to consider when raising finance. As a young business, you need to decide if raising equity finance at an early stage of the company’s growth is right, given that you are effectively giving away equity. If you haven’t built the momentum and traction yet, then you may not be in a position to reassure investors to buy a stake in the business.
Considering the type of investor you want is also important. A founder’s friends and family are often the first sources of capital for fledgeling ventures looking for seed capital to get an idea off the ground. Getting angel investment, which is nowadays commonly part of a crowdfunding round, will help take the business to the next level. Whereas, securing Series A venture capital investment, which is also increasingly forming part of a crowdfunding round, is typically about growth and scaling your business rapidly.
Businesses typically use early investment rounds to understand and optimise their business model so that can have a strong investment narrative for later stage venture capital funding.
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Another item for the ‘to do’ list should be ticking the EIS or SEIS box, which in simple terms is all about tax relief for investors, but businesses need to check they qualify first via HMRC. This is worth kicking off earlier rather than later, as the process can be bureaucratic. But it’s a very important factor for many investors.
Another item for the ‘to do’ list should be ticking the EIS or SEIS box, which in simple terms is all about tax relief for investors.
EIS (Enterprise Investment Scheme) is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares. For investors, it is a tax efficient way to invest in small companies and can help businesses attract investors in. SEIS (Seed Enterprise Investment Scheme) is a derivative of EIS, aimed at encouraging seed investment in early stage companies. Under the terms of both, a business is required to meet certain requirements before they can submit EIS or SEIS forms to HMRC. Once these have been processed by HMRC they will be sent out to investors. The process can take around six months from when you receive the share certificate to completion.
Another important box to tick is checking whether you own all of your IP, trademarks, etc. In the enthusiasm to raise funds this can be something that is easily forgotten. The reason why people invest is that they are inspired by companies with great ideas and big opportunities to grow and scale. But all of this can come crashing down if investors then find out that the company doesn’t actually own the intellectual property, as this is often where the real value of a company lies.
When it comes to attracting potential investors, imagine yourself in their position – what would they want to know? So you need to think about your ‘fundraising narrative’, in order to maximise the opportunity of pitching to a crowd of potential investors. Ensure you have a clear, concise proposition that outlines the market potential articulately – and why someone would want to invest in it. Remember people are more likely to invest in a business if it’s something they’re passionate about, so inspire and excite them.
Once you get investors on board and reach your fundraising target, the job of fundraising is not done by any means.
Every pitch on Crowdcube must go through a thorough due diligence process and this applies to any form of investment, whether it’s a VC or a loan from the bank. Outline the company’s strategy for growth and show that the business is scalable. Investors want to know about the potential return on their investment, so outline how and when this could happen.
Once you get investors on board and reach your fundraising target, the job of fundraising is not done by any means. People who have invested in your company, large or small, have a vested interest in seeing it being well managed and successful. Most of them are driven to invest because they believe in your company’s future, so you have a duty of care and certain fiduciary responsibilities to keep them updated on progress.
As a small business, you need simple, but effective strategies for your investor relations, so you are seen as reliable, transparent and accountable. These could include investor-focused emails or blogs or having a dedicated investor section on your website.
Remember investors are not just ‘the money’, but your brand advocates, business contacts, potential customers, and partners, so keep them happy and engaged.