Whether you’re trying to find an Angel Investor or applying for a business loan, the first thing to do when raising capital is to work out how much money you need. I realise that sounds obvious, but it’s not as simple as you might first think.
To work out how much capital you need to raise, you’ll need to do a business plan to work out where you want the business to go and to justify the strategy.
You’ll then need to do some financial modeling to work out the strategy to get there. Initially this will be a basic cash flow projection, but you’ll need to model several scenarios with different levels of funding at each stage. You should also model how different types of funding will effect your strategy.
For example, if you run a farm and want to raise money to grow the business, you might initially think you just need money for a tractor. You might later want money for more land, working capital to hire people and more machinery.
After outlining the end goal in a business plan, forecasting growth (including costs, risk mitigation costs, market analysis, SWOT analysis, etc.), you’ll need to work out a plan for the money.
You’ll need to do financial modeling to show how cashflow is effected if you borrow in stages vs all at once, and various other strategies in between. It might be that raising more money up front means that you can be more profitable and cover costs more easily and reach your goals faster. It might be that smaller tranches work better for you.
You’ll need to model different strategies with different types of funding. If you get a loan, can you cover the costs? Can you get a big enough loan to reach your goals? If you get an Angel Investor, will the freedom of having no debt mean that the business grows faster? If so, will your 80% shareholding in the larger company be greater than your 100% shareholding in the smaller company? Can you model a strategy that enables you to increase the value of your shareholding after X years? What does the model look like if you mix loans and investors? Can a smaller round of fund raising get you the money you need to grow the value of the business so that you don’t have to sell such a large part of the business to get the rest of the funds you need?
Once you’ve modelled this, you could optionally get any business valuation you used in your modeling checked by a professional (this can be done later, but may save time doing it now to avoid reiteration of the financial modeling stage). The valuation can be checked by:
- An accountant with valuation experience (less preferable because they don’t have access to market data so valuations tend to be out of line with reality a bit).
- A business valuer.
- A business broker (be aware that many brokers dont have the skill to do this for business where only shares are being sold instead of the whole business). I recommend Snowball Effect if you want a 3rd party opinion.
- The discovery process when pitching to investors.
Once you’ve worked out your strategy and how much capital you need to raise, you need to seek a loan (which could be via an institution or private individual) or an investor. If you’re going with an institution, you can stop reading at this point because the institution will have their own process they will guide you through.
However, if you are looking for an investor, you’ll need a Pitch Deck or Information Memorandum (IM). This is basically just a document that presents your pitch to the investor. Accompanying the pitch will be a number of documents, such as the business plan you made earlier, and some basic financial information.
Once an investor is engaged, you should research them to make sure they’re a good fit for you. Are they a silent investor or do they want a position on the board, or something in between? Do they have skills, experience or contacts that will help? Do they have a conflict of interest / are they a competitor? Are they happy with the exit plan?
Once you’re happy the investor is someone you want to work with, you’ll have to disclose more information about the business. You may wish to ask the investor to sign a Non Disclosure Agreement (NDA) before proceeding. At this point an investor will want to see financial information, evidence of things disclosed in the IM, financial modeling, etc.
If both parties are happy to proceed, you’ll want to start negotiating terms and you’ll need some legal documents. Specifically you’ll need a Company Constitution and a Shareholder Agreement.
You’ll want to have a commercial lawyer create this. Getting a good lawyer is very important. All lawyers say that they do commercial law, but the fact is most are only good at family law. It’s very important that you get a lawyer that specializes in commercial law – which usually means hiring a big law firm. This is expensive, but will save you money in the long run because there will be fewer rewrites.
I hope this brief outline helps start your journey to success. Please feel free to ask questions or share your experiences & learnings below in the comments. Also, don’t forget that I am an Angel Investor, myself, so please contact me in the comments below if you are looking to raise capital (I won’t publish comments aimed at contacting me, so your message will stay private).