When you start your own small business, you are confronted by challenges on different levels. You must convince the investors to accept to back your small business. You need a backer – an angel investor or a venture capitalist. To land that backer, you need a business plan, which helps your business achieve the backing you seek.
You need a plan that is clear and concise, and easy for the investors to read and understand. You need a plan that is coherent, agreeable and convincing, providing the evidence for your investors.
Before starting it is better for you to ask some question to take the first step more confidently. Where and how do you begin the struggle for the right investor? How do you conduct and manage the smooth process of these negotiations? Finally, how do you master your success?
The search for and the choice of financing alternatives, as well as the task of convincing banks and investors, presents a daily challenge to us. There are three reasons for this:
Your daily business cannot be put on hold.
The capital market shows no mercy.
The future is always uncertain.
The key to success lies solely in careful preparation. Two-thirds of all financing processes fail even before the first bank is contacted. Raising capital is often too great a challenge for managers to meet in addition to all the strain of everyday business life, the whole process being extraordinarily difficult to manage. Nonetheless, in order to achieve the best solution in this difficult situation, it is essential to adopt a pro-active, disciplined and methodical approach:
Plan your financial strategy.
Prepare yourself carefully for the funding process.
Involve the investor.
Planning the financial strategy
To stay in control of the funding process, you need a sound finance strategy for negotiations in advance. You simply need to know what you want and actually, expect from the funding process. It is precisely this awareness of The way to the investor the process that enables you to aim for the best financing option and to prepare and position the company for the involvement of the investors. Take a step back to consider the end of the game: Clarify your company’s position. What is my position?
Work out a realistic strategic plan:
What am I aiming at? How much capital do I require? When do I require the capital?
Identify your financing options: What sources of capital are available? What is your company’s position?
Before planning a financial strategy, you need to go through a sound gathering of information and a process of rationalization that will give you a complete picture of your company's current position. This effort should produce a coherent picture of the company that is consistent its future development. Furthermore, this process will also help to identify strategic obstacles which your company cannot overcome by itself and for which you will need support. These obstacles can be financial, operational or market-related.
A realistic business plan
Once all the requisite information has been collected and validated, you should then, develop a business plan that shows in detail what goal your company intends to reach and how you plan to do so. The business plan should:
Begin by clearly formulating the goals and direction of your company, describe each area of the company with regard to its contribution to costs and revenues, and provide a standardized picture of the company’s finances including a statement for the last three and next five years’ development.
Planning the financial strategy
The business plan is not just a means of raising funds, but rather helps you to consider your company from a strategic point of view. In addition to this, it offers you a schedule for the company’s future. For this reason, it should not be a document that is merely adorned with glorious references and pictures a promising yet deceptive future. It should rather be a realistic appraisal and assessment of your company and should show that you are aware of the weaknesses and strengths, i.e. the risks and opportunities of your proposed venture.
Identifying the financing options
With a strategic plan at hand, that establishes_ where you are positioned_what you aim at_ what you require
in order to achieve your goals, you can start considering which financing alternatives best suit your business idea. The company’s growth stage presents the first criterion for deciding which type of financing is possible. A company passes through different development stages: Seed, Start-up, and Growth.
In each of these stages, there is a choice of different financing alternatives. In order to be able to envisage the appropriate financing source for your company, various factors have to be considered. Here three aspects come to the fore.
The first aspect refers to shareholding: Are the existing owners or shareholders prepared to give up some of their influence and to what extent? Is your company able to amortize the debts? Has your balance sheeted the required strength to bear fluctuations in interest, repayments, and liabilities?
The way to the investor
The second aspect refers to the value chain: What is the search for talented employees based on in your company? Does your company have to obtain special access to potential customers, suppliers and strategic partners?Are you looking for an investor who can also act as a strategic partner?
Finally, the third aspect refers to a successful long-term relationship with investors: What level of commitment and involvement do you expect of your investor? Are you looking for investors who will continue their financial support in the future?
Preparing for the funding process
With the strategic plan at hand and a general investment direction chosen, you will be able to begin preparing your company for the funding process.
How? You should put your company through the same rigorous review it will face from future investors. The managing directors should analyze the company from the perspective of potential investors with regard to its profitability and the “Return on Investment” (ROI). This is called due diligence process.
Presenting the organizational structure
The most important criterion for an investor with regard to carrying out the business plan successfully is the “quality of the
management team” Does the management have the necessary experience which is essential for successful leadership? Can the company attract and retain qualified employees?
You should be in the position to show the investor that your company is focused on a profitable, attractive and growing market. If you want a 100% guarantee that you will get funded, develop a convincing list of reference customers.This does not only refer to customers who have already purchased. Should your product still be in development, focus on your potential customers? Is your company aiming at a profitable, specific, attractive and growing market? Does your company actually have customers? Do the existing stakeholders actively support the company?
Involve the investor
Negotiating with investors is like being on a roller coaster: The way to the investor_ the intensity of the first interview, the elation at their confirmation_the deep satisfaction after concluding the deal.
In spite of the strongly fluctuating emotions in both you and your investors, you should adhere systematically to continuity in order to get you the company successfully over this hurdle.The time and special effort dedicated to pro-active planning and preparation will involve the investors in a process that your company can then control. Along the process of involving the investor you aim consistently and focused on four rules:
First: Be choosy! Do not agree to everything.
Second: Go shopping for your deal! Approach it with the same perceptiveness
as when you go shopping.
Third: Negotiate the details!
Fourth: Close, collect and reflect!
Shopping a deal
To create a competitive combination of possible investors for a successful transaction, it is essential to approach at least five investors on average.Bear in mind, however, that members of the investment community talk to each other. So, you should beware of making controversial statements. Always compare supply and demand. Be consistent when pursuing the goal of establishing an intense relationship with the investor most suitable
in your case. Investors who wish to have a share do not only focus on the management team but also on the development, performance, and strength of your finances. However, there is no historical data available for venture investors, since the relevant companies are still in an early stage of development.
Negotiating details
Even if negotiations begin with the first interview, intensive negotiations do not begin until the third or fourth meeting.
Involve the investor
Your goal is to extract a term sheet from at least two of the possible investors. Focus, in a disciplined manner, on the structure of the deal and on how the financing can influence the carrying out of your company's strategic plan.Consider future financing possibilities and their impact on the investor, among these the preference ranking of financing options as well as the shifting of shareholding on account of further future investors’ entries.