Whether you are seeking funds from Venture Capital, Private Equity, Lenders, or the Public Markets, raising capital starts with (1) telling a compelling story about your business and (2) building strong relationships.
Competing in segments of the market that are growing faster than the market overall can lend excitement to the story.
Describe the revenue model in as simple terms as possible. Investors like to hear about volume in units multiplied by price to explain revenue. This applies to both product and service businesses. Then the story can be about how you will sell the number of units over time coupled with pricing plans over the same period.
Recurring revenue is often valued more highly by investors. This can be from subscriptions that extend over time, and from maintenance agreements. These revenues are perceived as stickier, and less likely to be lost to competitive forces. So, break these out in your revenue plan.
Use metrics that are useful in running the business. Focus on Gross Margins, and % Gross Margin, and show how the costs of sales and margins will change over time. Identify your most important vendors in the supply chain to show there are low risks in that part of the business.
Investors will want to understand investments in fixed assets and in research and development. Show how those investments increase capacity to support business growth, and how the launch of new products and services impacts revenue over time. Explain how you will manage those programs to minimize risks.
Show off your executive team and the experience they have in the industry. Identify previous employers, roles, and accomplishments to give confidence to investors in the capability to deliver on your plan. Many investors will only move forward when they are convinced about the team’s capability to manage unexpected events based on their experience.
In developing financial projections, start with audited financial statements. Then, base the forecast on recent actual results. Use cash flow metrics like days receivables outstanding and days payables for forecasts of working capital. Investors want to understand what it takes to get to positive cash flow from operations.
It’s important to pick investors that best fit your business. Pick a financier that has experience in your industry if you can. That way you won’t have to spend as much effort in educating them about your business.
Also, consider their capacity to provide more financing beyond the initial request. When you are successful in delivering on the plan, you may need additional funding, and working with a current investor can be easier.
It’s important to build relationships with investors. Provide reports on the business on a regular basis, and periodically meet in person and over video. Show the progress against the plan that was originally provided to them.
Answer questions that the investor provides in a timely basis, and don’t hesitate to pick up the phone to explain something.
When the unexpected happens, communicate early. It is important that they hear it from you rather than someone else. Trust is earned over time and strong relationships are key.
In summary, raising capital is facilitated by a compelling story. It is essential to build strong relationships with all involved in providing capital to the business.
Get more advice on Raising Capital from Deane Baron.