The fourth of a ten part guide series on how to tackle the often complex challenges companies face when they are growing

By Stephen Nicholas and Doug Wilson*

Raising money is tough.

It takes time, energy and 100% commitment.

How to focus on the day-to-day grind of managing your business, yet also commit fully to the funding process, is a ‘Catch-22’ that challenges even the most experienced entrepreneurs and managers.

Capital is an essential component of business success.

Whether you’re looking to fund growth plans, acquisitions or changes in ownership, you’re likely to need to raise funds to achieve your goals.

Investors are a hard-nosed lot and expect a business to demonstrate it’s got what it takes to deliver the goods over a sustained period, with substantial returns.

Clarify your competitive advantage

Investor’s will not fund mediocrity.

It almost goes without saying that you’ve got to show your business is different.

You need to stand out from the crowd, by presenting a competitive advantage or opportunity that the competition doesn’t offer.

Potential backers want to know the what, when, why and how: what you’re going to do, when you plan to do it, why you are the best business proposition and how you are going to make a return. And, if you can’t show how you will mitigate risk with detailed strategies, tactics and contingencies, you’ll fail to stand out from the crowd.

Sources of business funding include:

• loans and finance from banks – which tend to prefer lower risk lending

• business angels, friends and family

• equity capital from venture capitalists – who are really choosy, funding about one out of every 250 companies they see

• listing on public markets, which brings its own set of challenges and rewards

This guide focuses on raising money privately. Getting the best deal requires a disciplined three step approach.

on your marks...
get set...
go!

On your marks – plan the funding strategy

Before you start, work out:

• how much capital you need

• how it will be used

• where and when you need it

• where you can expect it to come from

• what return it will generate for the investor

• any exit strategies.

Irrespective of whether you get funding or not, going through the funding process is extraordinarily useful as you’ll be viewing your own business with a critical eye.

If you do it right, you’ll identify ways to fine tune the business, cut out inefficiencies and leverage missed opportunities.

Every part of the business has to be analysed, including non revenueproducing units, operational data, market assessments and current financials. All this needs to be reconciled with your longer term strategy and where you think the external market is heading. Making all the pieces fit is a great way to clarify your vision for the future.

Most importantly, having all the pieces in place helps build your credibility with investors - becoming ‘investor ready’.

The business plan should be a ‘warts and all’ insight into the strengths and weaknesses of the business.

It has to be objective.

Investors have seen it all before, so don’t try and sell them on rough and ready plans that don’t match commercial reality.

Run your plans by some tough minded, independent people who know the business and the market, including non-executive directors, advisors, and friendly customers and suppliers.

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Get it down on paper

Business plans are the core of the capital raising process, so don’t overlook the basic A, B, and C.

rticulate your vision and goals clearly and concisely.

Discuss each area of the company’s operations and establish a concrete connection between the likely costs and promised revenues.

The plan has to address outcomes, obstacles and future needs.

ase your plan on sound financial information. Paint a financial picture with forecasts for up to five years, as well as your historical figures.

This part of the plan will ultimately justify your need for capital, detail how much you need and outline what you’re going to do with it.

redibility is critical – take ownership of your own business plan.

Have a crack at writing it yourself – think very carefully before asking someone else to do it all for you.

Common sense tells you it’s important to seek input from advisors, directors and even customers and suppliers – but it has to be your baby.

What investor wants to work with people who can’t articulate their own vision and document their plans for the future?

Get set – prepare for the funding process

It’s time for a reality check – put yourself on the other side of the table. If you were in the investor’s shoes, what would you think of your business plan?

You need to ruthlessly investigate and test every aspect of your organisation’s ability to deliver the necessary return on investment.

Even if you don’t, you can be certain that they will.

Investors have a preference for people who have done it before – people who they know can execute the plan successfully.

If you haven’t done it before, consider bringing someone in the management team, or at board level, who has the relevant experience. Can you demonstrate that you have the right management, which has the necessary strategic vision, capability and commitment? Investors also need to be confident key employees will stick around, and that you understand the current team will have to change as the business grows.

Private equity investors, in particular, will look at your business in relation to competitive advantage, market size, management and history. Is it a sizable, specific, attractive and growing market; and can you take market share?

The process is about defining how the company will grow in the market you have chosen.

Show you’re serious

If you’re a young company, you will need references from partners, suppliers, actual and potential customers. If you can’t persuade these people to work with you, you won’t convince the money men.

If you have existing investors, their support is absolutely imperative.

It’s no surprise that investors will go through the financial package with a fine toothed comb. Support historical and projected financial information with rock solid data.

You’ve got to make assumptions, but make sure they’re underpinned carefully and disclosed fully. Models built on shifting sands tend to collapse at the first prod of an investor’s pen.

Build your sales model from the ground up, breaking down revenue by product, service line and geographic location. All financial information should dove-tail together and be presented in a consistent format.

The business plan is not just about getting the money – it’s about giving it back as well. You must take into account when investors will want their money back.

Exit options are important for both banks and equity investors. Can the bank get its loan repaid on time? Can the venture capitalist look forward to a listing or trade sale?

By this stage, you’ll probably have mountains of information. Keep it simple and structured in three key, consistent documents:

• three to five page executive summary

• twenty to fifty page business plan

• ‘due diligence’ files containing all your supporting data.

Go – build a relationship with investors

Dealing with investors is a roller coaster – the high of the first successful meeting, the see-saw ride of negotiation and the elation of closing the deal. But you need to maintain a clear focus on your goals throughout the entire process.

Do your homework, be selective and don’t shop your deal around town.

Investors are a close knit bunch and chat among themselves. You don’t want to get a reputation for being desperate to talk to anyone who will talk to you.

Balance the need to create demand with the goal of establishing a relationship with the single most appropriate investor.

Where you don’t have a relationship with an investor, find someone in your network that can make an introduction. Tap current investors, board members, advisors, accountants, lawyers and the like.

But keep in mind, all a referral can do is open doors, it won’t seal the deal.

Remember you only want referrals through the front door, not a side entrance. The last thing you want to do in a relatively small investment community like New Zealand is to use up goodwill by wasting investors’ time.

Before an initial meeting, get a good idea of their current criteria for investing, and develop your pitch accordingly. While you are keen to pitch your company, be careful of dominating the meeting and failing to listen to what investors are asking. Leave plenty of time for questions.

Keep communicating

Don’t expect to raise capital at an initial meeting. It takes time to build trust and committment.

By the third or fourth meeting, you’ll know you’re talking seriously. This is when intense negotiations begin.

Your goal now is to earn a commitment from the seriously interested parties, so focus on the one you really want to bring on board.

As a general rule, venture capitalists will focus on management and market, while later stage investors and bankers will be more concerned with the company’s historical performance and financial health.

Keep in mind that you will need to make trade-offs to secure funding but keep an eye on the bigger picture; what you need to happen to achieve your goals.

Your negotiations will succeed or fail based on how well you manage the investor’s perception of risk and reward.

The finishing line

Even when you are deadlocked across the table with your potential investor, keep the finishing line in sight. It’s easy to become complacent on the home straight, so keep pushing until the money is in the bank.

Be proactive and provide answers even before the questions are asked.

Regardless of what anyone tells you, genuine investors don’t release the purse strings easily. There are always a series of hurdles to jump and layers of decision-making to navigate. These vary from bank to bank or from one private investor to another, but we guarantee one thing: you’ll always think there’s one hurdle too many.

Don’t get despondent when another barrier pops up out of the blue. Think of it as an opportunity to show just how resilient and persistent you can be.

Throughout the entire process, maintain good working relationships with all the investors you engage, even the ones that reject you or the ones you reject, because you never know what the future holds.

Eventually, it’s a done deal. The cash is in the bank.

That was the easy bit, now it’s time to start delivering on all those promises ...

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Stephen Nicholas is a partner at Deloitte NZ in Wellington. You can contact him here »
Doug Wilson is a partner at Deloitte NZ in Hamilton. You can contact him here »

This Guide is part four of a series. It is used here with permission.

Part one is about Strategic Planning and is here »
Part two is about Alliances and is here »
Part three is about Managing Risk and is here »
Part four is about Raising capital in New Zealand and is here »
Part five is about Marketing and is here »
Part six is about Outsourcing and is here »