I’ve spent the better part of the past 20 years working with early-stage companies to help them raise capital. The past few years have been tough. First, uncertainty over Brexit impacted the industry and then, of course, Covid and now we’re seeing a rapid rise in the cost-of-living. Indeed, the ‘golden years’ seem a bit of a distant memory. But the start-up ecosystem has grown massively in that time. There are more funds, investors and support networks then there ever has been ‘ so it’s not all bad news. Despite this, the space is very much nascent and we still see a lot of great businesses which are woefully underprepared to raise capital.
So, new year, new start. I’m going to outline what you need to do now to raise capital in 2022.
What does your business do?
Too often we see business propositions that are simply not clear enough. Saying that you are, ‘the Uber of x industry’, ‘the AirBNB of Y,’ not only, makes investors cringe, but fails to elucidate your proposition. So, start by describing your business in simple terms. I always advise doing the ‘mum test.’ If your mum can’t understand what you do, then you need to keep working on your elevator pitch.
Your investment proposition
The next thing to focus on is your investment offer. The investment offer is all about money. How much do you value your business at, how much you’re raising (both target and overfunding limits) and if your businesses is eligible for tax relief.
So many companies decide their share price (valuation) based on ‘finger in the air methods. Entrepreneurs need to approach this as one would putting a sale price on their home. Look at the cost of similar properties in your area ie what businesses similar to yours in terms of stage and sector have recently raised capital and at what price. I see so many that are unrealistic and the truth is that a too-high valuation can kill your raise before you’ve even started.
Your library of documents
You are going to need to prepare a lot of documentation to support your raise. Let’s start with legals. As a limited company, you will have Articles, but you’ll need to ensure there are adequate provisions for pre-emption rights and tag-along and drag-along rights. Your lawyer should also prepare a Subscription Agreement outlining the terms on which the investment is made, i.e. share price. Lastly, a shareholder’s agreement is useful to have, although this isn’t necessarily required.
If you are promoting your raise as being S/EIS eligible, it is prudent to seek Advanced Assurance. This is effectively a stamp of approval from HMRC which confirms that you qualify.
Your contracts and key agreements
As part of a due diligence process, investors will want to see your key agreements. It is best to have these at the ready in a secure document room for easy, controlled access. The list here will vary from business to business, but can include, lease agreements, key supplier and customer contracts, insurance, and contracts of employment.
Disclosures
It is best to disclose any potential problems up front. This gives you a proactive opportunity to show how you’re addressing them and makes life easier for potential investors. Disclosures include things like open disputes with suppliers, customers or employees, previous insolvency, outstanding invoices including VAT, potential conflicts of interest and directors’ salaries.
Intellectual property
If your Intellectual Property is fundamental to your business, you’ll want to declare ownership up front. Sometimes, entrepreneurs accidently put IP in their name instead of the businesses. You’ll want to show it is the business in question that owns the IP and not an individual or third-party.
Financial statements
You must be prepared to share recent, actual management accounts (profit and loss, cashflow and balance sheet) preferably via a secure data room (to protect confidentiality). If the funding takes longer than expected, say three months from inception, provide updates.
Corporate Governance
A good non-executive board (i.e. individuals not involved in the day-to-date running of the company) can support the executive team and help steer the business to success. If you have one or plans to put one in place, declare this.
Studies show that most pitches fail to succeed because of market issues, management profiles, and financials. To get investors on your side it’s essential to be fully investment ready.
“
