Nick Hood is the senior London partner at Begbies Traynor, the UK’s leading independent business rescue firm. He looks at the pointers business consultants need to give to budding entrepreneurs trying to raise finance for their ventures.
It should be every consultant’s dream: an enthusiastic client keen to turn their original idea into a business. But as every experienced consultant knows it can be a long journey from drawing board to board room.
Thanks to BBC television’s latest reality show, The Dragons’ Den, the general public has seen behind the scenes of one of the commercial world’s most difficult pitches – finding capital. The most original, intriguing and practical proposal will remain no more than an idea without the necessary financial backing. But raising capital can be difficult even for those with a decent track record and for new entrepreneurs, the task can be nearly impossible. In the fictional Dragons’ Den the vast majority of contestants get the thumbs down from the panel of successful business people. Sadly, things are no different in the real world, where few business ideas ever get the backing they are seeking.
This is no great surprise because so many entrepreneurs are badly prepared when they go before potential backers. This is true even for substantial companies looking for investment support in the City or experts at Venture Capital Trusts and more so for the ones looking for funding from business angels or their local clearing bank.
As all consultants know, the one essential tool for fund raising is a comprehensive business plan. It needs to have a focussed summary of the business itself, supported by financial projections, an outline of the marketing strategy and a thorough evaluation of the market and any competitors. The financial projections must be more than just a simple profit forecast. They need to include a cash flow projection and a prediction of how the company’s balance sheet will look at the end of the forecast period. The business plan must also be as brief as possible, otherwise it will end up in the waste bin long before the investor reaches the end. It should have an executive summary right at the front, setting out all the key facts in one page of bullet points.
One element often missing from badly prepared business plans is a clear summary of the major assumptions on which they have been based. This is the angle from which much of the questioning by potential investors will come. If the entrepreneur can set out his assumptions clearly and explain the rationale for them, the plan will be much more professional. The investor may not agree, but at least he will understand the thinking behind the business.
Another common fault is a lack of any sort of sensitivity analysis. The only certainty about all business forecasts is that they are wrong, the only questions are by how much, in which direction and, crucially, why. Business plans need to recognise this and identify what the impact will be if, for example, the business misses its sales target by five per cent in the first year.
The final point to keep in mind is what happens if the business does better than expected? If it creates an early break even point, or greater profits that will be a huge bonus. But the downside it will almost certainly mean that it will need extra working capital and the founder will need to address how to raise this. The investor may have a limit and be unwilling to provide extra money, even if it is for such a good reason. If this occurs early on, it may be too soon to be able to demonstrate the sort of track record that some other funding sources, like factors and invoice discounters, like to see. This is not something to put in the actual plan, since it will suggest over-optimism, but the entrepreneur needs be ready with an answer just in case.
Once the plan has been drafted, the consultant needs to play devil’s advocate with his client, asking all those awkward “but what if” questions. Listening to your suggestions and taking your advice may not be easy for the entrepreneur, so the maximum inter-personal skills are required at this point. You may be experienced and have helped prepare a thousand business plans, but the client will be suffering from that curious mix of stubbornness, optimism and self-doubt that often characterise the breed.
When everyone is happy with the plan, it needs to be turned into a professional presentation that is a digest of its key elements. The presentation should communicate memorably what the business does. As a rule of thumb, if the core purpose cannot be explained in 30 seconds, the pitch is too complicated and the investor will lose interest before the client even gets into the supporting facts and figures. The old cliché about identifying a “unique selling proposition” still applies even if it may have been overtaken by newer management jargon.
It is essential to practice the presentation before making the pitch. I have seen the credibility of some seriously good projects destroyed by a hesitant delivery and worst of all when the technology gets the better of the entrepreneur. Most presentations these days are done in PowerPoint, but there should always be hard copy sets of the slides available in case the projector bulb blows or the PC crashes.
The questions the real life panel of Dragons might ask need to be anticipated and strong well-researched responses prepared. Once in front of the potential investor, the approach needs to be open and not defensive. Detailed questioning must be anticipated and the entrepreneur and his team need to be able to demonstrate why their skills and experience will justify the risk the investor is being asked to take.
One regular mistake is not raising enough money. If an idea is sound, a professional investor will be happy to put in a little more, if it gives the business a contingency fund to deal with the unexpected costs and problems that are inevitable with all new ventures. Having to go back later to ask for more is usually difficult unless there is a very good reason why the extra requirement wasn’t anticipated at the outset.
Entrepreneurs must also be realistic and get guidance about the potential value of the business. They need to be willing to give up a significant share of the action. There is a myth about the management needing to have the vast majority of the equity to maintain their motivation. In reality investors will want a meaningful share of the company and they won’t be interested in a trifling 10 per cent. They will also want a very healthy return on their investment and a planned exit route so that they can see how they are going to get it back.
Raising money for new ventures is difficult at the best of times, but good consultancy advice and a professional approach can prevent it becoming mission impossible.
