Magazine article Management Today

SME Accelerator: I Wish I'd Known ... How to Raise Money

Magazine article Management Today

SME Accelerator: I Wish I'd Known ... How to Raise Money

Article excerpt

Mission near impossible or not, securing finance is a skill you simply have to master, says Nick Hood.

It's one of the hardest things in business to persuade tough, professional moneybags to invest in your company. Entrepreneurs will tell you how hard they found it to extract funding from private equity groups, venture capitalists or business angels. Many simply decide not to bother, leaving their businesses undercapitalised and cash-starved Such firms rarely make the FTSE 100.

And the sea change in risk awareness among investors, no longer looking at life through pre-recessionary rose-tinted spectacles, means that finding finance is now doubly difficult.

If your business needs more capital, the first principle is: don't wait. It always takes longer than you think, so start looking for it a good six months before you need it. If you don't, prospective investors will take advantage and demand big slugs of your equity.

Always raise enough money, even if you have to surrender more equity than you would like. Raising too little and returning for more later allows investors to extract a high price for your original timidity. I once advised a printing business into which an investor had injected pounds 400,000 for a 30% stake, but then demanded another 30% for providing just pounds 50,000 more in a cash crisis that ought to have been predicted at the outset.

Establish whether your prospective investor has the appetite and resources for more rounds of funding after the first one. Switching horses in mid-stream or running two investors in parallel can be difficult and risky.

Investors will have a different attitude from your own, especially over their exit route. Confirm their agenda on this vital point before you sign any deal. Expect the VC firm to be looking to dispose of its stake in about three to five years - at a hefty profit. Also, find out how active your investors want to be. If they are sleeping partners just looking for a decent return, you may find their lack of involvement frustrating. But if they want to be more involved, can you live with their proactivity?

Choose an investor to match your needs. The best option is someone who brings the industry contacts and skills that your team lack, as well as their money.

Look at your assets before you start handing out equity. Can you borrow more, or on better terms, against them through specialist funders, such as leasing firms? …

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