If you're seeking to raise external funding from investors, the first step is to define the type of investors that are right for your business and situation. That will dictate the kind of approach you take. Whether that's personal investors (usually a close acquaintance), angel investors (someone who helps a very new small business), venture capitalists (someone who offers funding based on your business' long-term potential) or peer-to-peer lenders (loans direct from an individual, without any middlemen), you need to make sure that you match their needs before you reach out. Here's a more detailed breakdown of the different kinds of investors.
You'll need to get your affairs in order and understand what specific investors will want to see and present it in a compelling, watertight way. Remember, for a lot of investors, their primary responsibility is to maximize return and minimize risk. You'll be expected to include information on aspects like your business model, key financial figures, talent, expected terms and spending plans. Specialist expertise, in the shape of lawyers and accountants, is going to be needed (and you'll want to bake the cost of them into the amount of capital that you're seeking).
Why it's important
Raising money through investment is super hard. Given the number of pitch decks that investors of all shapes and sizes are likely to see – and what you're going to be asking of them – it's a no-brainer that you first need to spend time diligently preparing and ticking the right boxes. Plus, this is about finding the right partner for your business. A targeted approach to fundraising means you'll be raising from the right kind of investors – those whose values align with yours and who will offer you terms that work for your long-term goals.
A poorly planned, premature ask can permanently harm relationships; you should approach investors only once you have complete confidence in your business. Research on the pre-seed round by file-sharing solution DocSend shows that venture capitalists are spending more time than before on information related to monetization and business viability. This process is about investing time to de-risk your business – and making sure it's set up to benefit from whatever investors can offer you.
Things to note
Readiness is round-specific. Investment readiness changes depending on what specific round of investment your business is looking to raise. For example, what you need to provide when you're looking to raise money from friends and family or an angel investor is quite different from what a venture capitalist will want to see. Here's a good starting point as to what investment readiness looks like in each round.
Pick your moment. If you've decided that external investment is the right route for your business (and this is a huge decision), you need to time things right. Investment rounds can take a while to close, especially if you're casting a wide net to ensure that you're getting a good feel for what the investment communities' general terms are and what appetite is like for your business model. A general rule of thumb is that you'll need to start approaching people at least six to nine months before you expect to see any cash. But, if you begin having conversations with investors before everything is polished, you can often work with interested parties towards readiness.
It's about strengths and weaknesses. How long the preparation period takes will depend greatly on your business' unique combination of strengths and weaknesses. You need enough time to position your strengths in the best way possible and to tackle your weaknesses. For example, you might have a strong team and a strong product, but be lacking some of the key financial figures. Remember, investors invest in people (eg, the founding team) – you may not always have the right answers, but understanding your business and industry is key.
You can still fail. It might sound obvious, but being investor-ready doesn't guarantee anything. At the end of the day, there's a fair amount of subjectivity involved. That shouldn't discourage you, though – a good angel investor or venture capitalist will either be able to refer you to someone else within their network or keep their door open in case their position changes down the line. Never be afraid to ask why you were turned down, ask for referrals and use the feedback to tighten up your investment case.
How to become investment-ready
1. Focus on your story. Start by outlining a clear and compelling narrative for your business. Think about the problem you're solving and what gives your product an advantage, if you're looking for growth capital. You need to be able to articulate this in a succinct and captivating way. Your business plan should provide the blueprint.
2. Prove that there's a market. Accumulate some data to validate your story. That might range from the size of your market to bringing in user research. If you haven't launched yet, show that you're aware of any barriers to entry and detail how you plan to overcome them. If you can, outline why you're better than your competitors. If you see your position in your market as a particular strength, try to garner things to back this up, like awards, partnerships or press coverage.
3. Show accurate financial records. If you don't have a trading history, this section will be less important. Although there are some things you'll still need to include, you should demonstrate viability in other ways, such as market tests, web traffic or sign-ups – this will validate that there's a product-market fit. If you have been trading, you need to get everything related to that in one place – AKA a data room. That might include previous quarters' trading history, your balance sheet and cash-flow reports. Getting some financial expertise at this point will be necessary.
4. Tick the legal boxes. Look into the specific legal requirements at each investment round in the country you're operating in. On a basic level, you need to be allowed to offer equity, be registered as a company and have a co-founder or shareholders' agreement. There are additional things too, such as intellectual property ownership, insurance details and contracts with employees, suppliers and customers.
5. Present your team. Ensure your leadership team is up to the job. Detail the skills and experience of the key decision-makers, making sure that they'll stick around after the investment is completed. If you're lacking certain skills, bring people on board with those abilities, or outline how the investment would help you do so. You should also formalize your business' governance structure. Mock up an organizational chart and outline how decisions are made and how new shareholders will influence this hierarchy.
6. Show where the money fits in. You need to ask for an amount of money that reflects where your business is and what it'll take to grow in the way you seek. Show your working: that might include a financial plan, with sales and spending projections for the year ahead and the impact the capital will have. You'll need to outline what your plan for the investment capital would be – for example, with X amount of capital, you'll be able to achieve X return on investment.
7. Know how much a stake is worth. Get a sense of how much of your business you need to offer in return for an investor's money by landing on a valuation. Similar businesses in your space can offer a comparison point, and here's some information on valuation methods. Although valuations will vary, you'll be expected to explain how you reached yours.
8. Show where the shareholders fit in. Don't forget to think about the other perk of investment: expert involvement and advice. Clarify what you'd like to achieve with the help of an investor. Then, think about terms, protections and options for your shareholders. All potential investors will want to know who already has shares in the business – this will be shown through something called a cap table. With legal support, consider what will happen in the event of additional funding rounds and when you project that shareholders will make a return on their investments.
• Being investment-ready is a minimum requirement if you're looking to raise money from investors – it's about backing up the story you tell about your business with evidence.
• Broadly, you'll be looking to demonstrate the strengths of your business' opportunity, financials, legals and founding team. It'll be much of the same ground that's covered in a business plan.
• This is about zooming in on your strengths and weaknesses – leveraging the former, de-risking the latter – and thinking seriously about what your investor needs when it comes to a return on investment.
Perspective. Richard O'Brien from Triodos Bank offers six tips on becoming investment-ready, with a specific focus on social impact.
Example. From investment firm NFX, here are 12 reasons venture capitalists decide to take first meetings, with input from a whole bunch of venture sources.
Tool. Eventually, you'll have to undergo a due diligence check – here's a template. Use it for reference as you get investor-ready. This investment readiness canvas from design agency BMI is interactive and helpful.