At some point in history, businesses often need external funds to help their growth trajectory.
However, acquisition investment has its dangers and pitfalls, and the last thing the board wants is to invest time and money, reaching the point where funds can only be obtained. As a business attorney who has handled funding rounds for decades, James Fulforth, a senior partner and partner of Kingsley Napley’s business, corporate and financial team, explains some of the reasons why fundraising can go wrong, so how best to avoid it.
Valuation and Finance
Investors will want to see the company increase its reliable valuation of investments, and the more material behind it, the better. Has the company traded? If so, what finances are available? If any year-end accounts are completed, those accounts should be disclosed, but ideally, they will be accompanied by the latest managed accounts.
If the initial trading is moderate, the focus will be more on forecasting for future periods. These are usually incorporated into the company’s business plan.
Even if the company looks at the position carefully, financial forecasts are highly speculative in nature, which is why guarantees in transaction documents are rarely supported. If investors do invest in early stages, then the future relationship between the founder and the investor will be happier if trust is built. If the initial valuation proves too bubbled, the relationship may start to acidify quickly, and the founder will spend more time managing relationships with frivolous stakeholders than building the business.
Take a realistic, even conservative approach to valuation and prediction to avoid overselling the idea and then exceeding these expectations.
Propose
The credibility of a company’s business plan will depend on the nature of the product or service, the market, and the extent of data available to support the company’s analysis. Investors will consider the extent to which products or services have been developed, started and tested.
Have the experts been involved in reports about products, services or markets, and such reports can be considered independent and therefore trustworthy? How original is the original idea of business ideas that protects its basic intellectual property? If there is little substance behind the proposition, then even if financial performance and valuation are moderate, investors will find it difficult to see the value of the future.
However, if the founder is unable to express the company’s claim, a highly detailed analysis may have limited value. Much depends on the personality of the individual and founder team. More introverts may have technical skills, but they need to be complemented by someone with vitality, charisma and leadership skills.
Many successful businesses are led by gifted individuals, but raising investment involves intense competition. A balanced team of founders tends to look more compelling.
Prepare
Careful preparation before raising funds is crucial. Without applying the same level of expertise to the company’s management, carefully researched programs and strong marketing will make experienced investors almost unattractive. The same is true of the due diligence process and the way the founders participate in the process.
While family and friends may be prepared to rely on their trust in the founder, more complex investors will need to answer detailed questions in detail. The most important thing is the capital structure. Are all sharing issues and sharing options correctly recorded?
Do you have expectations and write down with major suppliers, clients, employees and consultants? How standardized is such a term? Has the company acquired ownership or licensed for all major assets, such as intellectual property? What governance is around data, cybersecurity and regulatory issues? Potential investors may want to go back to when the company is formed, so ideal founders should start addressing any gaps in these elements early on.
Any obvious problem found can be difficult to resolve quickly and can hurt a lot of hard work in terms of the proposition of design and sales.
These aren’t the most exciting elements of running a business, and some founders simply don’t have the desire or skills to get them focused, but, again, the key is to prepare someone on the team to understand the details and address any wrinkles that will inevitably appear directly.
Other investors
Ensuring a chief investor is often the key to attracting more investors, especially if that investor is well known or has important expertise in a particular sector. Even if this is not the case, the lead investor is usually someone who has spent time understanding the company’s products, services, or team, and as long as they look credible and able to express their views to other investors during the due diligence process, they will help reassure smaller investors and build motivation.
However, founders should be cautious about an investor being too close to them, and they should conduct their own research on the background and records of that individual or institution. If the chief investor exits a round, it may be followed.
If this happens shortly before completion, damage can be significant. If a company is lucky enough to choose between investors, it should be strategic about who to work with and may not want to put all the eggs in the same basket.
An ideal investor or investor will not only provide capital, but also provide business experience and real knowledge of the industry. They may even be the right person the company has on the board.
Founder Terminology
Finally, the founder should remain realistic about his own personal compensation and terms of holding shares. Even if they may have a large amount of vested vested stocks before the fund raises, investors also want to include appropriate protections that may include requiring the founder to offer their stock for sale in some cases.
Likewise, the protection required will vary depending on the nature of the parties involved and their experience, and also on other elements already involved, namely valuation, founder’s history, the nature of preparation and dynamics between the investor group.
Negotiation will be easier if the founder can prove the rationality of the overall claim with confidence. But an unrealistic founder may fall on the last hurdle. These issues need to be carefully considered with the consultant, just like the company’s valuation, the key is to be reasonable and long-term thinking.
This also applies to compensation from other employees. Investors will want to see employees properly motivated to maintain and fulfill and add value to the company. Companies that do not provide employees fairness (for example, through EMI) have the potential to lose important talent to their competitors.
Make sure that funds have their pitfalls, you should always seek expert advice to help your business go through the entire process, but if properly managed and executed at the right time, the results can prove your business change.
