Starting a business is an exciting adventure. Often this is not a luxury 5 * adventure however- it’s the type of adventure where you are constantly looking for ways to cut costs, piggyback off freebies and hold on tight, until there is some light at the end of the tunnel. Often that light comes in the form of external investment, allowing you to take your business from idea or start-up, to a bona fide business venture.
As with any epic adventure, planning is essential. Some business ventures require capital from the outset, be it to build the technology behind the idea or the product itself. Other start-ups thrive by initially bootstrapping. It is common however, for these businesses to require external investment to achieve growth at the rate they desire (or require). This initial funding is often achieved via various routes:
- Friends and family. Entrepreneurs target investment from their personal network. When this takes the form of investment (as supposed to a loan), they may become SEIS registered, to reduce the risk for investors via tax relief.
- Angel investment. Angel investors look to invest in exciting companies they feel could achieve growth to create a good rate of return on their investment.
- A crowdfunding campaign is run with the aim of sourcing funds from the general public until a target is met.
- Various schemes run government backed start up loans on preferential terms and at preferential rates to allow companies to access finance.
So how do you know when you are ready to seek external finance for the next step of your entrepreneurial adventure?
- Your business idea fixes a problem
The best ideas tend to come when an entrepreneur has identified a problem and developed a solution in response to that problem. What problem does your idea solve? And how does it solve it? Or how does it solve it in a more effective manner than previous solutions? Sadly, purely providing a solution is not the end point. Is this solution viable? Most customers will have a price they are willing to pay, or if there are customers willing to pay beyond this, there may not be enough of them. Beyond investment, it is customers who will ultimately be ensuring the business maintains a turnover. In relation to this, it is important you have a sales and marketing plan. You could have invented the best solution ever, but if no one knows about it, it won’t get very far. It is also a good idea to be aware of the competition- so you can pick up on both their strengths and weaknesses whilst being aware of where you fit in amongst them. Performing a competitor analysis can help with this.
When you have fixed a problem, got a viable solution, know how to market it and you’re aware of where you sit amongst the competition, you’re in a much stronger position to apply for financing.
- You have proven the concept
Very few investors will be interested in investing in a dream that has yet to leave the drawing board. Formally registering the company is a great place to start and can be done via a formations company. Investors also need to have some form of proof of concept. This does not mean you have to have the finished product- indeed you may well be seeking investment in order to get the product to that stage. If you do not yet have the finished product, think of how you can best bring your idea to life in the form of a prototype- for example, a basic version of a product, or a story board showing the different pages the website will have. At this stage you probably need more than just an idea, but some form of proof of engagement with the concept. This could be customers you have signed up, reviews or actual sales. When you have this proof of concept, your business is showing signs of being ready for external finance.
- You have written your business (and finance) plans
While you may have an excellent idea of how your business is structured, what your strategy is, where your revenue will come from and who the team is (and will be), these things need to be adequately documented for investors. Investors need to be able to see and understand fully not just how the business is currently operating, but how it intends to operate going forward and post investment. An important part of this is the finance plan. Investors will not simply throw money at a business and pray for the best- they want to know how that money will be spent in order to grow the business as well as gaining an insight into how the business operates financially. For example, in a product-based business, what is the cost of goods sold? What are the operations expenses? This will help investors not only assess how viable the business is, but if it will provide a good return on their investment, showing that your business is ready for financing.
- You have a strong team and leadership (or will do)
The best idea in the world will not get very far without a team to implement the idea. At the head of this team there needs to be strong leadership. A strong leader will identify the gaps in their own knowledge, and employ those who not only plug these gaps, but have expertise in these areas. Running a start-up is a rollercoaster and this leader will also have to have the strength of leadership and management to guide and encourage the team through these difficult times. The team itself also needs to be the right people, to drive the company through the next stage of growth. Sometimes, companies are financing in order to employ this team and that’s okay too. Being able to show investors who you plan to hire or what roles you intend to fill will show investors that even if you don’t currently have the team in place, you’re aware of the requirements and have started to plan who these next team members will be. This will show to them that you are ready for financing.
Another sign you may be ready for financing, is when you have a great team and leadership, but they cannot handle the demand. This is a sign you have a strong proposition, but in order to keep up with this demand, more staff members are required. This also makes an attractive prospect to investors, as the concept is being proven successfully.
- You have physically outgrown your space or your market
Often the need for financing comes at growth intervals in a business, showing that it is time to employ external investment in order to take the business to the next level. One of these growth stages can be outgrowing the physical space your team occupies. You may therefore need the investment required to upscale your office or warehousing. Another growth stage may be that you have outgrown your market. For example, you may own a small jam company that predominantly operates at weekend markets. However, with growing demand you need to upscale and start to supply retailers and create an online shop, but this will require significant capital outlay for more staff members and more stock. This growth is a sign you are ready for financing, to take your business to the next level.
- There’s an opportunity you just can’t refuse
Sometimes an opportunity arises that you just can’t refuse but will require extra funding in order to take up. This is a sign that your business may be ready for financing. For example, an international partner may approach you, interested in taking your business to their countries market but this will require capital outlay in order for you to launch your business in this new market. This is also an attract offer for investors, as the concept has already been proven to the extent it is in international demand.
- You can spend wisely (and have proven this)
External investors, be it angels, friends and family or a business lender, will be interested in how capable your business is of spending wisely. This will be proven in decisions about how and why money is spent in certain areas, but will also be shown by more formal means, such as business credit scores. A good credit rating will not only provide more options, but more attractive options, as you will be seen as a more attractive risk.
Whilst taking on external funding can be a daunting prospect, it can also be the step up required to take your business to the next level. By ensuring your business is ready for this next stage, you can make the process less daunting and easier by having all the preparation required to show investors what an attractive option investing in your business is.