Friday 31st March 2006
How to hit the jackpot
Persuading investors to part with their cash requires guts, gall and a bit of good luck, but it’s all too easy to misjudge your audience and fall flat. GrowthBusiness explains what not to do when trying to get funding.
When a growing company first seeks significant outside investment it can be a big challenge for the owner. They’ve got to pitch it just right, selling the company’s strengths at the same time as giving an honest representation, while also making a strong case for growth potential and financial viability. Without previous experience of speaking to investors, business owners can easily trip up. Here are some of the most important do’s and don’ts when approaching banks, private investors and venture capitalists for funding.Be prepared
The overriding message from investors and advisers is, make sure you’re fully prepared. You need to show you have a comprehensive understanding of all the financial details of your company and have a clear and carefully considered strategy for the business. Without exception, investors will want to be convinced that you have everything under control and sufficiently planned. A weak or bad business plan can scupper a fundraising altogether, which is why Charles Whelan of corporate finance boutique HW Corporate Finance argues that companies need to employ advisers. ‘They will have written hundreds of business plans and can ensure chief executives are well prepared for pitching to investors,’ he says. ‘Practise your presentation,’ says David Porter of financial adviser Best Invest. ‘Don’t read from a script. Memorise the presentation and be flexible enough to field questions when required. Also, try to make sure any demonstration of the product actually works. Things do sometimes go wrong in demonstrations but the risks can be minimised with preparation.’ Be concise in your answers to questions, he adds. ‘Even if you aren’t trying to avoid the question, you’ll alienate investors if you waffle on for ages before giving the answer.’ It’s also important that you make yourself available for follow-up telephone calls. There’s nothing more frustrating for investors than if they phone you to ask supplementary questions but can’t get hold of you.
Provide good financial information
Make sure your accounts and financial results are up to date. Richard Lee, corporate development director of stockbroker WH Ireland, says that poor or non-existent management accounts are guaranteed to put off investors. ‘Financial reports should include proper comparisons to last year and to budget.’ Another classic mistake companies make when pitching to investors is that the figures in the presentation don’t match up with figures in the accounts or other literature from the company. But if they legitimately don’t match because of recent changes, explain the reasons and the adjustments made. Be realistic about value
It’s common for business owners to believe their company is worth more than investors think it is. The danger is that if you have an inflated view of your company’s value, it could deter potential investors before they have even looked at the business properly. And if you then cut the valuation significantly this could further worry them. On the other hand, undervaluing your company could limit the amount you raise. This is particularly true when floating on the stock market and issuing shares. Whelan warns, ‘It’s not a good idea to approach potential shareholders with a set percentage of the company you want to give away in return for their cash. It’s better to make clear how much you want to raise and then negotiate with the investors about the final percentage they will own.’ That way, you’re more likely to negotiate a good deal on the equity you distribute at the same time as securing the funds you require. According to Charles Whelan, it’s standard practice to discount forecasts or projections, so that targets are more easily achieved or exceeded. ‘Don’t come up with outrageous forecasts but don’t be too conservative either because investors will tend to assume that they won’t be hit and drop their expectations even further.’ Whelan says that on a scale of one to ten, with five as average and ten as wildly optimistic, a company should pitch their forecasts at around seven out of ten to allow for investors’ scepticism. If investors are too sceptical about your ability to deliver what you say you can they will be put off. Mike Fletcher, director of Corporate Finance at investment bank Altium, believes that management teams with overambitious plans will be found out and their credibility will suffer. Anyone putting money into a business will assess the robustness of the assumptions in the business plan, so be realistic about the risks that could stop you achieving your goals.
Andrew Hore
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User comments by Brian Walton at Monday 9th June 2008
Having just read Mr. Hore’s article about International Seafood Products and the aborted floatation and having been closely involved in the floatation I feel I have to comment. It would seem that Mr. Hore does not have any of the facts or if he has he has not stated them correctly. He has he asked for comment from the Directors of the company or of Mr. Lecuona himself. I can confirm that Mr. Chris Barker of Nobles, the nominated advisers, and Mr. Brown of Noble Capital, were advised by Mr. Lecuona of the action of the TSA, when he sold a friends stock after receiving telephone confirmation from the friend to do so. The Directors of the company were also fully aware on this matter as explained by Mr. Toby Hayward the CFO. Hore does not report that it was Mr. Lecuona who cancelled the float on being advised that there was this omission in the prospectus. Hore’s comments are wholly inaccurate and while they may sell news papers and make good copy the comments are journalistically inaccurate, not researched and unfounded.