We all have big ideas, but an idea is one thing and turning that into a business is another. Most of the time becoming an entrepreneur will mean sacrificing the security of a yearly salary, and be under no illusion. this is one of the scariest things any person can do in their lifetime. However if that entrepreneur gets that business right, the rewards can be more than worth it.
One of the biggest hurdles that any business faces is gaining investment, whether this is seed investment, expansion investment, investment for a cash flow issue or maybe just an investment for a big advertising push, whatever the reason, gaining investment is vital for any business and securing it can be the difference between success and failure.
Statistically only 5% of entrepreneurs get funded, does this mean that only 5% of all ideas are good enough to succeed? In short the answer is no. Normally entrepreneurs get so ensconced in their business; they forget to look at the bigger picture. A common mistake is that entrepreneurs don’t understand the difference between having a need for capital and being ready to ask for it. Most of the time the entrepreneur will only start looking for investment when they need it and this gives off worrying signs to the investor such as: I need you to bail me out of my bad management of the limited capital I had, or I’m unwilling to invest any more of my money, so, I need yours and finally I haven’t been able to raise money from anyone else, so I need you to save me, all of which will make an investor run a mile.
On the other hand an organised and often more successful entrepreneur will understand the need to look to the future and what it will take to run a business. In turn this will give the investor good messages such as: I’m ready for a partner to help me take this to the next level, or I have a handle of my product, my market and my customers, and I’m ready to accept an investment that’ll help me grow, and finally, I have researched the various sources of capital available to me and I’m ready to work with you because you are the best match.
Choosing the right investor is a big decision for an entrepreneur to make, they need to decide whether they want an investment of just cash or a strategic investor who can help in the running of the business and make such things as key introductions. If you are looking for the latter, it’s important to clarify with the investor what you expect of them. There are many different types of investors from angel investors, who predominately invest in start-up and small businesses, and then there are the larger VC’s (Venture Capitalist) and Private Equity companies who invest in small businesses that have shown a good cash flow and have potential for scalability, in other words growth. When asked what do you look for when making an investment in a start-up business, Peter Dubens founder of Oakley Capital said, “Management, scalability, protective position, it never changes for me”.
On speaking with a number of investors there was one common thread in all their opinions when asked “where do entrepreneurs falter when seeking investment”, Henry Talbot-Ponsonby of Venture Capital Partners said “if they haven’t made enough progress before they start speaking with investors: entrepreneurs need to know how to prove their concept and do everything in their power, and with their limited resources, to prove that concept before asking someone else to take a risk on it working”. Dubens added that another fault was entrepreneurs “being over optimistic, nothing ever delivers as per the plan and more people should present 3 business cases”. It’s clear from both these opinions that an entrepreneur who has proven his business to be a success is in a far better position, both in regards to gaining investment but also and more importantly in regard to negotiating on equity. There are those companies on the other hand that gain investment from paper, these however are normally ideas that invent a new market or require a sizeable investment from the outset to make them successful, but like all ideas, the business plan must be strong and presented well with a strong management team possessing the experience to make it happen.
Management is key to all businesses and is critical to gaining investment, so much so that all the experienced investors we asked, named it in their top three criteria for investing, and Henry Talbot-Ponsonby went so far in saying, “management team, management team, management team”. The reason for this is that a good management team gives confidence to the investor, resulting in their risk becoming a calculated one based on the evaluation that a team is in place that has the ability to reach the businesses goals.
For young entrepreneurs there is the common misconception that age is a factor when gaining investment, and whilst this may be true in regards to getting a loan from the bank (which let’s face it is unlikely unless your parents put up the collateral) but is not entirely true when it comes to investors. Peter Dubens flat out denied that age is a factor stating, “Age does not affect the proposal but may affect the structure and team required to deliver the business”.
Potential for growth is key and showing a strong understanding of the market counts here, you have to ask yourself questions such as, what is the size of the market, how will I gain a market share and why is my business different to those already existing. Investors want to know the return on their investment and this comes from potential growth or scalability, they want to be able to look at the current business and imagine how it could grow, you have to help them see the potential. Ideas such as diversification, other revenue streams and expansion globally are key issues here.
All the elements talked about above are essential, however, as investors will agree, these all depend on you, the entrepreneur, there has to be chemistry between the investor and entrepreneur. Trust is undoubtedly the most important factor; the investor is giving you their hard earned cash, on the principle of belief, they therefore must trust all that you are and do. The entrepreneur has to be prepared to make concessions with those investing in their company, they most probably have experience that you won’t and it is essential that the entrepreneur is willing to accept this. Ultimately the investor will be exit driven and why shouldn’t he be, always remember this.
The investment industry is changing; technology is allowing strong business ideas to come through with only a fraction of the start-up cost that was needed before. Although technology is changing the type of investments, the fact remains that, in order to gain initial investment you have to be able to show the right criteria, this is one thing technology won’t change.
Gaining investment is hard, however as Henry Talbot-Ponsonby puts it, “there is a lot of money out there for good companies”.
Prepare, don’t rush, test, manage, listen and grow.
This article is from the Spring issue of The Gentleman’s Journal Print Edition. To make sure you don’t miss out on exclusive articles and interviews, subscribe at thegentlemansjournal.co.uk/subscribe/
Words Harry Jarman
Photography Finn Bruce