To raise equity investment, you need to make your business attractive to investors – they will look for a sound business plan and the right management team. This is of course one of the first things you will learn when utilising corporate finance services. But of course there are also other crucial areas to consider during the process. As a recent piece by Bloomberg indicates that investment in Africa is increasing, we take a look at equity investment specifically and what your options in this regard may be. If working in Sub-Saharan Africa, engaging with corporate finance consulting services in South Africa might be a good suggestion.
At our sister firm, SLC Impact Investment Fund, we typically see that of every 1,000 proposals received, only 20 will be invested in. The most common reason for rejection is that the plan is at concept stage only.
These figures suggest that many businesses seek equity investment before they’re ready. You need to have the combination of a strong proposition, an able management team and good preparation to give you a better chance of raising money. Investors expect substantial returns, and try to mitigate their risks of not achieving this.
Propositions must be watertight, clearly scalable and differentiated from your rivals. Research potential investors. “If businesses treat potential backers as if they are potential customers they will probably get a far better response,” advises veteran VC and CEO of Caban Capital, Dave Romero. Find out about:
■ Their investment range
■ The stage of business they typically finance
■ Geographical reach and sector preferences
Look at the investor’s deal portfolio. If your business is similar to companies they already have on their books, they may decide not to commit more money in that sector. If you’re looking for angel finance, go to angel networking events and listen to speakers to give you an idea of the companies you’re up against our management team
It’s important that an investor believes in and likes your management team.
Investors look for the following: Personal qualities: Emphasise your entrepreneurial pedigree, illustrated through your past successes and lessons learned. Contacts: You should have good contacts and you need to talk to relevant people, including suppliers and customers.
You must believe in your business enough to invest a significant amount of your own money and be prepared to devote 100 per cent of your efforts to it. Team: Directors should have previous experience in their role, and at a similar level. Track record: A strong record helps, though if you’ve been through tough times you may have a clearer idea on avoiding pitfalls.
Age: Investors like to back sector experience and preferably those who have already run a business. If you and your team are in your 20s or over 50, raising finance for the first time may be harder. Hiring an experienced non-executive director is a possible solution. Management skills: Do you have the ability to manage growth as the business evolves, or to turn the business around should it struggle?
The returns you can offer
For equity investors, the overriding concern is what multiple of the investment will be made and how quickly. They’re geared towards opportunities allowing them an early exit, through sale or flotation [for more on exit strategies, see the box on page 28]. They will ask themselves the following questions:
■ Is the business plan sound?
■ How will we exit from the business?
■ Who’s going to buy it or how will the market react to flotation, and how can it be achieved?
■ What are best and worst-case returns?
The emotional side
Raising equity investment means being prepared to give up a stake in your business. You may feel nervous about relinquishing control. However, do bear in mind that by attracting investment you are growing your business – though you end up with a relatively smaller slice, it will be of a much bigger pie.
You should be prepared to face intense scrutiny and questioning of your judgement and decisions. This can prove to be a positive influence, however, as being accountable to investors may help to focus your attention and drive the business forward.
If you get turned down, remember it is a largely subjective process, influenced by the preconceptions of institutions and individuals. Treat any rejections as chances to improve your offering, ask for constructive feedback and try to fill gaps in the proposal. You have to demonstrate you can get on with backers and that you are resilient and dedicated.