If you're running a business, you'll often be thinking about profits and looking to re-invest for growth. However, there may come a time when your ambition for growth exceeds your available funds and you need to seek external investment.
“My co-founder and I decided from the launch that we would always grow the business organically first, before looking for investment,” says Yaron Rosenblum, co-founder of Canvas Offices, a flexible provider of personalised office space for businesses.
“Having done this for several years, we knew we had built the Canvas brand and business model to a point where the only way to accelerate growth was to secure external funding.”
In this article, we'll explore how investors help companies grow by providing capital, advice and business support.
What can investors provide?
Investors can provide much more than money. Many will have experienced real-life business successes and failures that equip them with wisdom you can’t learn online or in a book, explains Anthony Impey, CEO of Be the Business, a not-for-profit organisation supporting business owners. “This level of experience can be priceless for an early-stage business, providing you with insights that you probably wouldn’t have learnt yourself for years to come,” he says.
At the same time, investors often have access to extensive contacts to support you in growing your network. This could be business contacts within your industry, other companies that they invest in, or even supply chain or manufacturing contacts that they can recommend.
What makes a good investor for your business?
A good investor should be aligned with your business goals and values. This doesn’t mean whoever can give you the most money, Impey notes. Instead, an investor that understands your industry can be a ‘priceless asset’, he adds, since they can share crucial knowledge to steer you in the right direction.
Canvas Offices chose an alternative debt provider, specialising in providing loans to small and medium–sized businesses, for its initial round of investment. The team understood Canvas Offices' vision and were united in similar brand values, says Rosenblum. “Not only are they great people, but their own growth trajectory and appetite to lend aligns perfectly with our own strategy for growth,” he says.
An investor that has worked with businesses similar to yours will be able to share learnings to help you reach your goals faster and with fewer ‘bumps’ along the way, says Impey.
Types of investors
Friends and family
This can often be the first type of investment a company raises, with the aim of funding your new venture through its first few months as it becomes operational.
Angel investors
“Angel investors invest their own money, tend to specialise in early-stage businesses and often work on their own,” notes Impey. They are typically wealthy individuals who are passionate about supporting young companies.
Venture capitalists
Venture capitalists invest other people’s money and tend to invest at a later stage than angel investors. They are often employed by venture capital (VC) firms and tend to provide expertise alongside their investment. Often, they will take an ownership stake in a business.
Accelerators
Accelerators tend to provide young businesses with a combination of investment, mentoring, connections and office space. Many specialise in a particular area, whether that's industry, location or the type of company they support. Unlike a VC, they also tend to take cohorts of companies over a specific time period, such as six months.
Corporate investors
Large companies are increasingly starting their own venture arms to find and support small companies with industry-leading innovations. This means you can gain access to funding, industry-specific expertise and client connections.
Alternative debt
Alternative lenders specialise in providing loans to small and medium-sized companies. Unlike a traditional bank loan, the loan requirements are often more flexible. The benefit of a loan is that it allows you to grow your business valuation further before raising equity investment later on.
“When we got to £5,000,000 in revenue and £1,000,000 in earnings before interest, taxes, depreciation, and amortisation (EBITDA), we decided to source a great corporate finance advisor,” says Rosenblum. “Their advice was to multiply our EBITDA via a debt facility over the next three years, before establishing an investment vehicle with both debt and equity investment to enable us to accelerate to the next level.”
How to find an investor
Understand what you need
For Rosenblum, while Canvas Offices was growing well organically, the business didn’t have enough free cash to keep investing in new buildings, which was stifling growth. “This was incredibly frustrating, as not only were there excellent investment opportunities on the market, but we had the client demand and contractor availability to match.”
Impey notes that a key consideration when finding an investor is how involved you want an investor to be. “Angel investors often prefer to be passive investors, while VCs usually ask for some level of operational control in your business,” he explains.
Set a clear strategy
“The bottom line for an investor is the bottom line,” says Impey. “They do what they do to make money, so if you’re going to attract investors for your business then you need to demonstrate, as clearly as possible, how your business would do that.” This means taking some time to detail your vision, with a clear growth plan showing how you will achieve your goals.
Get your documentation sorted
Canvas Offices worked closely with a corporate finance advisory team to ensure all the company’s paperwork, from accounts to important documents like the Information of Memorandum (IM), were in the best form possible, shares Rosenblum. An IM provides a comprehensive overview of your business for prospective investors, including company history, details of your products or services, the market and competition and your unique selling points.
Scrutinise your numbers
Before you meet investors, Impey recommends working on your financial forecasts, to ensure they include a profit and loss account, balance sheet and cash flow statement. Ensuring you set a realistic valuation for your business is also crucial, he notes.
“An unrealistic valuation can quickly ring alarm bells for potential investors,” explains Impey. But you also don’t want to undervalue your business by giving away too much, too early, to secure funds. “Invest time in properly crunching your numbers and getting as accurate a valuation as possible,” he says.
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Network to look for investors
Business incubators, accelerators and trade associations are a great place to start finding an investor. “Business associations can provide you with advice and support within the early-stage investment ecosystem,” says Impey. “They will also have established networks that include potential investors.”
Finally, if you’re looking to find investment, you need to start several months before you need the funding. “At a minimum, the process of raising capital for your business takes around six months, but in reality, you should be prepared for this up to 12 months or even longer in some cases,” Impey says.
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