The #1 question we get asked by founders is:
“How do we raise funding or investment for our business?”
Every successful business reaches a stage where it has to choose its growth path. Either you grow organically, using operational capital as and when it’s available. Or you use growth capital in order to scale up faster. If you are considering the fundraising route, there are a number of things you need to nail in order to be funding ready.
Our CFO team has worked with dozens of companies going down this path. We have condensed our learnings into 7 key steps that you can use to hack the fundraising process for your scale-up company.
- Build a great business
The best way to raise money from investors is to build a business that is so good that investors come to you! You can try really hard to be investment ready, but if you don’t have a good company first, it can be quite a tough exercise.
What makes a great business?
A great business value proposition that serves a real purpose in the market. Always ask yourself, “What are you addressing in the market and what value are you offering to your clients?”
A strong team leading the business. An idea is only as good as its team; the real value lies in the execution of the idea.
Cash flow management: Sometimes it doesn’t matter how many sales you push or how much profit you make. At the end of the day, if you are struggling from a cash flow perspective, it can prohibit your company’s growth.
As your business grows and improves, it will start attracting the right types of investors. Who not only bring capital to the table, but also expertise and valuable networks that the company needs to scale up. The next 6 key steps are the tools you need in place for those conversations.
- Have a clear expansion strategy in place
More often than not, entrepreneurs want to raise finance, but their strategy to grow the company after that is unclear. You need to have a crisp strategy laid out in order to convince investors to back you. There are existing resources in the business, as well as new avenues to consider.
It is important to have a good understanding of your scarce resources, these being staff capacity, limitations of current tools and machinery, etc. The CEO should be flexible with time so that he or she can focus on the vision and growth of the company – not just working in the business but also focusing on the business.
- Have a good financial model in place
You need to have a solid financial model that shows how your strategy is executed in monetary terms. Whether it be over 3, 5, or 10 years, depending on what is applicable, you should be able to demonstrate clearly how revenue, cost of sales, expenses, and capital investments are expected to flow, so the investor can see how that strategy turns into numbers.
- Plan ahead – it will save you a lot of time going forward
- Use the right tools for collaboration and efficiency
- Do your research. If you’re approaching a specific funder, some may have a specific template they prefer to use. So read up and get it right from the beginning.
- Your model needs to be smart and flexible. The reality will look very different to how you forecast it. So incorporate those variables for when scenarios change – your financial model needs to be adaptable and cope with that.
- Understand your company’s value
Your company’s value can be a subjective matter. An investor will see the value differently to how the founders see it. It’s important to look at what the person on the other side of the table would see in the business – of what value is it to them? If it’s a foreign investor who wants a footprint in Africa, the discussion will be different to that with a local investor. So know your investor and know the demand.
When it comes to company valuation, ask an expert if necessary – even if it’s just to get a ballpark figure – and build a proper valuation model that can support that. Remember, your company valuation is not only a financial exercise. It’s also people and processes exercise which incorporates sales, marketing, and other aspects of your business.
- Nail due diligence
Be proactive in making sure you have an updated bank of all your documents ready. Historic financials, team CVs, tax compliance, monthly management accounts, and more, are all the different things to put in place for your due diligence deck.
If we just look at the end valuation, sometimes a good DD pack can influence the price by up to 20% just by showing what management has done over time and how value has been built in the business. Whilst one is running a business, have it in the back of your mind. Put processes in place to ensure all relevant financial information is recorded and easily accessible for an investor, should the opportunity arise.
- Make sure that legal and HR is in place
Contracts and policies are some of the big things that often get neglected in building a rapidly scaling company. So get them locked down, not only for investors but also for you as a business.
When it comes to HR, culture fit plays an important role in recruitment. Finding the right person who will add value and work well with the team can make all the difference. Encourage continuous growth and learning, and invest in your current staff instead of replacing them.
Regarding the legal side of things, do your research and understand your industry. Ensure that memorandums are in place, and be aware of the responsibility of founders and shareholders. Employment contracts and client agreements can all have a significant legal impact on your business.
- Get real
Only you know what the biggest gaps in your company are. Talk to your founders, and identify and address these problems first. Some gaps start with business owners being too busy in the day-to-day operations, leading to issues with compliance. Why not bring in a professional in order to streamline your function and allow the management team to focus on growing the business instead?
Mindset also plays a big role in any side of your business. If you want something, you need to be creative, look at your environment, and get the mentorship and guidance to help you. Being a business owner can sometimes feel like a lonely journey. It is important to get a solid support structure in place. You are the one that needs to drive your business, so if you’re not passionate about it, it’s going to be difficult to get others to be.
There you have it. Don’t spend so much time on raising the next round of funding that you deviate from building the business. Also, first build a great company and be funding ready before entering investor conversations.
Over the next few months we will be sharing more detailed content on many of the steps we’ve spoken about today. Our CFO team is currently working on over a dozen consecutive fundraising readiness processes for clients, so there are sure to be many golden nuggets that you can draw from for your own journey. Keep following the OCFO conversation on our new website and on social media. Happy fundraising!