Helping prepare your business for investment

If you’re thinking about raising capital to grow your business, Tim Wixon, BNZ’s Head of Tech Industry explains in four steps what you can do to help make the journey easier.

Stats NZ reported that our GDP fell by 12.2% in the June quarter of 2020, so we’re in a recession. It may seem odd to talk about raising capital in uncertain times or high-risk environments, but this week I read the Startup Genome report which found in the last two recessions (2000 and 2007) fewer dollars were spent by venture capitalists worldwide, but more companies got investment. It could be the perfect time to lengthen your cash runway or sell part of your business as with low interest rates, money is burning a hole in the pocket of an investor somewhere. Your business may be just what they’re looking for.

I’ve observed that it’s not easy to find the right investor with smart money (cash with networks or skills you want) compared to just money. The better prepared you and your business are to accept capital and an investor, the more capital options you could attract and it’s more likely you’ll find the right person to help you along the way. Funnily enough, the same holds true for getting the best out of a bank from a financing perspective.

Here are four steps to help you prepare your business to raise capital.

Step 1. Understand the capital pathways

Globally the number of newly listed companies on the stock market has decreased by about two-thirds and their IPOs (Initial Public Offering) are occurring later*. It’s possibly because there’s been a rapid growth of alternative ways to raise capital that are less onerous, faster, cheaper, and potentially more relevant.

Understanding how the capital game works and who is playing will help you approach and develop the right team. A quick look around New Zealand and you will discover a myriad of sources: angel investors, venture capitalists, local networks, Government backed providers, banks, incubators and accelerators, crowdsourcing, peer to peer, corporate investors and then there are the offshore options. There is a pretty comprehensive list of tech funding investors on the Kindrik Partners website, plus New Zealand Trade and Enterprise have a free learning portal called InvestEd which is a useful first step.

But before you rush off and start emailing or calling people, take the time to build and articulate your story and evidence it with data. This is often best if your business is unique, has strong barriers to entry, intellectual property or otherwise protected intangible assets (to prevent others from copying you while you’re developing the business). If you can prove your business has high potential, chances are you may need to give up less shareholding in return for the money than you thought. That is, if you’re well prepared.

Step 2. Get yourself ready

Investors buy into you as much as the business, so spend time to tell your story. Commitment and character will often trigger the decision of an investor who wants to know ‘can I work with the owner, does the owner know what they are talking about, are they resilient enough for the inevitable ups and downs?’ These questions are just as relevant to bankers.

Demonstrating your experience handling unforeseen circumstances can help de-risk the investment, as future planning rarely survives the impact of extra cash.

To help get yourself prepared, you can:

• list your ‘sweat equity’ (time and energy spent fighting your way to where you are)
• have a clear strategic plan of where you want to be and how
• be clear on your longer-term goals (exit or keep going bigger!)
• be able to articulate your story in one line, two sentences and ten slides
• prove you can take advice (a board, advisors or mentors)
• understand the capital-raising process (selling a part of your business and sharing control)
• have worked out how to value your business so you can ask for the right price
• know how you will use the capital and why.

If you can present your business opportunity without confusing the audience, along with accurate and concise documentation that helps to back up everything you say, then you’re probably ready for the next step.

Step 3. Get the business ready

A business that has loyal repeat customers, high margins, strong growth potential and runs like a well-oiled machine would, on the face of it, be an ideal business to invest in. But someone conducting hard due diligence will dig a little deeper and want to see much more than ‘everything is awesome’. I’d suggest you could focus on the following things initially:

• a clear competitive advantage
• a sizeable expanding market and your target niche
• protected Intellectual Property (IP) and intangible assets
• data and indicators to back up your claims
• a professional team
• transparent financials.

There’s lot more you will need to cover through the due diligence process (including what your business does!).

Step 4. Finding the right investor

Deciding whom to work with is the final and maybe the most essential step, as you don’t need to accept the first proposal and you could be together for some time. If you have more than one investor, I’d suggest referring to my earlier comment about wanting ‘smart’ capital, where someone can give you money, guidance, support, contacts or open doors to new customers or supply chains.

An ideal investor should be able to:

• align with your vision and goals
• work towards the same goal
• complement or augment your skills
• loop you into wider networks
• have access to more capital.

Before approaching the investor, find out which companies they have invested in, the amount of money they spent and their skills and interests to increase a match with your business. You could even talk to the people they invested in to assess their management style.

Last thoughts

My final (and critical) piece of advice is don’t be afraid to pay for help early. Your business still needs you day to day and raising capital can be distracting and time-consuming. You could consider finding someone qualified to guide you through the process and share the decision making, who is ideally external to the business and understands your industry. This person could be found through a referral from your existing advisers (accountant, lawyer, banker, your business network), your local Regional Partner Network, or from the current investment networks outlined earlier.

Good luck.

* https://www.fma.govt.nz/assets/Reports/Growing-New-Zealands-Capital-Markets-2029.pdf

The information and recommendation(s) in this article are the personal views of Tim Wixon and do not necessarily represent the views of BNZ, or its related entities.

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