Business
How to Prepare your Venture for Equity Investment
When you consider the impact of Brexit and reduced growth forecasts for the UK, it’s little wonder that our SMEs are struggling to cope. Recent reports also suggest that more than half of these firms are also struggling to secure the requisite level of funding, while a further 24% were unhappy with the type of funding available to them.
Equity funding can be a particularly controversial vehicle, as owners must sacrifice a percentage stake in their ventures in order to secure an equivalent amount of capital.
While this may not always be ideal, it remains a viable source of funding (especially for firms with expansive growth plans). There are also ways in which you can drive a superior deal as a business-owners, and we have outlined some of these below.
- Understand What Equity Investors are Looking for
In order to successfully target investors, you’ll need to develop an innate understanding of their mindset when they look for opportunities.
If you’ve ever traded stocks online or through a platform such as GKFX, you should be able to leverage this experience to help achieve some crucial insight. Appraising growth stocks requires you to analyse metrics such as profit margin, historical earnings growth and the underlying rate of growth, for example, and equity investors follow a similar path when evaluating businesses.
This should give you a clear idea about which areas to focus on and improving these metrics can help to create a viable investment proposition and a likely time-frame for completion.
- Think About How Much Money you Need, Rather than Considering your Shareholding
When you follow the equity funding path, you need to commit to this fully and prepare yourself mentally for the difficult challenge of diluting your ownership stake. This can be a huge struggle for some entrepreneurs, and one that can encourage poor and ultimately costly decision making.
More specifically, there’s a tendency for owners to reduce the amount of money that they ask for, in the belief that this will not impact their own shareholding too adversely. This is the very definition of a false economy, however, as this will force you to sacrifice equity in your business without obtaining the capital that you need in exchange.
So, prioritise the needs of your business at all time, and ensure that you come up with a proactive plan that reflects both your cash needs and your desired shareholding.
- Be Realistic About your Valuation
As you complete the steps above, you’ll begin to develop an understanding of your businesses strengths, weaknesses and financial performance. This, in turn, should be used to inform your valuation, as it’s important that you create a proposition that is both financial viable and attractive to investors.
Setting a realistic valuation is also central to your credibility, and without this you’ll struggle to engage investors to start conversations in the first place.
Of course, you may be forced to settle on a valuation that is lower than you expected at the outset. Rather than simply hiking this to reflect these thoughts, however, you’d be better served by managing your expectations or considering alternative funding options for the future.
