| Ten steps to securing funding |
| Thursday, 11 June 2009 02:50 |
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Steps to help steer businesses through the process of seeking angel investment.
Steps to help steer businesses through the process of seeking angel investment. The funding landscape has changed dramatically following the onset of the credit crunch and the subsequent financial crisis with once popular options, such as debt finance, suffering as a result. Businesses left struggling to find working capital or replacement to bank debt can instead turn to angel investment which is rising in prominence as a viable alternative.Below are some steps to help steer businesses through the process of seeking angel investment: 1) Put in place a strong management team Few early stage businesses have complete management teams and very few can claim to hold all the skills required to maximise the potential of a business. Entrepreneurs who can recognise their weaknesses as well as their strengths and plan accordingly will be well placed to raise investment. 2) Create a business plan identifying the strategy A solid business plan that presents the corporate strategy is crucial. The plan must contain a commercial idea which will provide an eventual profit for investors or, as a minimum, sufficient profit to repay the interest and the principal on a loan. 3) Define the Unique Selling Points (USP) Aside from coming up with a compelling business proposition, entrepreneurs must ensure that nobody else is offering exactly the same product or service as they do. Similarly, they should have a particular USP which makes them different and potentially more profitable than their competitors. It is then necessary to consider how easy it would be for another business to replicate the product or service, assuming that it is not patented. 4) Protect your business Depending on the business, there are times when protection is an absolute must-have. An easily replicable product for example, if protected, can be a great investment. Entrepreneurs should also ensure they understand how patents and other forms of intellectual property work, which may require seeking professional advice. 5) Determine a sensible valuation of the business Early stage businesses are notoriously difficult to value. One rule of thumb is: a solid business idea alone, £10,000; a solid business idea with a reasonably presented business plan, £50,000; both of the above, plus a good management team with relevant CVs, £250,000; all of the above, plus a sale - any figure upwards of £500,000. A better approach is perhaps to apply the rule of thirds, with the valuation split between the inventor, the management team and the investment. 6) Decide level of funding required The level of funding required is largely dictated by what stage of evolution the business is at. Established companies with revenues, profits and an order book, that are seeking working capital or replacement of bank debt will typically fall in the £350,000 to £1.5 million bracket. Broadly speaking, start-ups or early stage businesses seeking funding for final product development/take product to market will tend to require £150,000 to £450,000. In both cases, the amount must be sufficient to fund the delivery of the planned stage or end result. 7) Prepare your business for due diligence Due diligence is usually carried out when an investment or acquisition is going to be made and is the process of checking the facts of a business, including its market, key staff, directors, financials and legal position. Any investor and many banks who do not have a direct relationship with the entrepreneur will require a level of due diligence on their affairs before investing or loaning funds to the business. However, there is a real danger that investment deals will fall through if influencing factors are uncovered during the due diligence process that were not originally apparent. For example, it could be that the investee had failed to recognise the point as relevant. 8) Appoint a solicitor It is essential to appoint a solicitor who has experience of similar forms of investment in small businesses. One example of where this is required is that, in line with the Financial Crime Prevention Procedures, the business and the solicitor will have to verify the identity of investors before accepting any investment. 9) Learn how to approach an investor Arranging investments is a regulated activity which can only be carried out by firms authorised to do so by the Financial Services Authority (FSA). This must also be done with information authorised by a FSA-approved firm. Direct approaches to potential investors by individuals can be considered a criminal act and result in the individual making the approach becoming personally liable for any losses incurred by an investor. This is unless the individual has received certain certifications from the investor before seeking investment. 10) Have an exit plan Having a well thought through exit plan is a key element of obtaining investment. In many ways, the actual form of exit is less important than the principal that there will be an exit at some point - generally within three to seven years.
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