Too many businesses think that fundraising is easy, and that the money will just arrive. It isn’t easy, it’s very distracting and can involve a forensic analysis of your business in the due diligence process. Fund raising almost always takes longer than you think, and you need to allow for this.
One of the things you must do in the process is not to shy away from asking the hard questions of yourself and the prospective investors. There is a temptation to be completely focussed on raising the money at almost any cost. Which of course has the potential to come back and bite you at some point in the future.
This is a question to ask yourself. It sounds obvious to ask this question, but a lot of young businesses seem preconditioned to look for funding as the only route to future success. They don’t consider the alternatives.
There are some sectors where it is possible to get to early profitability with just some early seed funding. It might be a bit slower, and the growth might not be as explosive, but the trade-off is maintaining total control for longer and a bigger share of the equity and avoiding a very distracting fund-raising process.
For ‘bubble’ businesses or companies that require a lot of funds for research and development this might not work, but for companies in the service sector it might just work.
Again, a question to ask yourselves. Investors want to know what the money is for and will expect you to spend the money against those plans. The clue is in the word investment. The investors will expect the money to be spent on new hires, marketing, tech or kit, not pay rises and funding cash flow.
It is important that you and your team are all aligned on what the future strategy is. Before embarking on the process, the team need to agree what they want from the business and roughly what the exit time frames are. They then need to be consistent in delivering this message when asked.
By taking money from investors, you are already committed to releasing the value in the business through something like a sale or IPO.
You also need to make sure that the investors are aligned with your strategy and your timeframes. This will often be more rigid than yours, so be clear on what they are and agree them upfront.
Upfront alignment in the team and with the investors is vital to a successful partnership.
Most companies strive to be the best business they can be. Have a hard look at where the business is. The due diligence process is hard and invasive. You need to make sure that the financial systems are robust. That you know where everything is. That you know your business and your sector better than anyone else.
You need to make sure that the team will share some of the workload. There will be a lot of distractions and you need to be convinced that the company will still function through this period.
Fund raising is a proper process and you need to be convinced that you can manage it. If you aren’t convinced then you might need to look for outside help.
This is a question for the investors. It never fails to amaze me how little businesses looking for funding ask of the potential investors. They are seasoned, experienced investors and will act as though they own you if you aren’t careful.
Due diligence is a two-way process so make sure you ask the hard questions of them. Ask about their background, the deals they have done, what they want from the investment (apart from their money making money), ask to speak to a business they have invested in.
They will almost certainly offer strategic help. Most offer it and fail to deliver. Get them to show examples or maybe challenge them to offer some of this help in the investment process.
The overall advice I would give is not to be intimidated by either the investors or the process. Many businesses looking for investment are just grateful. If you have a good business you will deserve investment. Do not succumb to deal fatigue or stop asking questions.
Ask the hard questions of yourself for good preparation and of the investors in the process. They will respect you for it.
David Pattison is a chair, mentor and advisor for multiple businesses in diverse industries. After becoming a board director at the age of 29 and co-founding his successful media agency PHD, he has advised over 20 businesses, chaired 10 and led three successful exits. David currently chairs three businesses and convenes MBA and MSC courses at Manchester University Business School. His new book, The Money Train: 10 Things Young Businesses Need to Know About Investors, won best Startup / Scaleup book at the Business Book Awards 2022.