Q&A: How to make an impression with investors and raise finance
Julie Glenny, Investment Director based in Maven’s Glasgow office, sets out her advice on how businesses can make an impression with investors and raise equity finance.
1. What kinds of businesses do you invest in? Is there a “typical” business or something they all have in common?
At Maven we see businesses at various stages of their growth trajectory and across many sectors, from beauty wholesalers and innovative tech solutions, to crematoria services. There is no typical business or sector that we work with – what we look for in our investments is a strong management team with the skills to take the business forward to its next stage of growth.
Maven provides a number of flexible funding options to support dynamic SMEs, and can invest up to £15 million in a single transaction. This includes private equity investment, VCT funding and debt or equity funding from the several regional growth funds it manages.
The finance Maven offers can cover a variety of transactional activity including management buy-outs, buy-and-build strategies, acquisition finance, development capital and replacement capital.
2. Why is it so important for small businesses to manage their cash flow effectively?
Cash, not profits, is the lifeblood of any business and enables it to operate. Problems may start to occur where cash generation is low as business owners may then be unable to meet their obligations to suppliers. On the other hand, retaining too much cash within a business can mean this is not being re-invested to generate growth, so the right balance needs to be achieved.
3. What types of finance are best for SMEs with short term cash flow problems?
The majority of Maven funds are there to provide growth capital and not to bridge short term cash flow problems. Regular and accurate forecasting are key for businesses to understand their cashflow needs so that appropriate action can be taken to address issues on a proactive basis. In most situations, SMEs with short term cashflow problems should look to senior debt solutions such as overdrafts, invoice discounting or asset based lending options.
4. What kinds of finance are best for SMEs with ambitious long-term plans?
This is exactly the type of scenario that Maven would seek to support through the provision of equity and/or debt and we would look to agree a flexible funding structure which accommodates the SME’s longer term strategy. The option of whether debt or equity is best for the business is usually driven by several factors including the strength of the existing balance sheet, current and forecast cashflow generation and the underlying purpose of the funding.
5. What is the process from A to B of a business applying for investment and being handed the money?
This is dependent on the type and extent of funding that the business is seeking. For example a Maven MBO transaction would be funded via equity and is likely to require a larger investment which would then drive a broader due diligence remit compared perhaps to a business looking for a smaller debt investment.
In every case we will need sight of a detailed business plan and financial projections providing information about the market, management team and growth strategy. Following an initial assessment by the Deal Team, each transaction then goes through a robust internal review and approval process. The decision on whether to proceed rests with Maven’s Investment Committee which is made up of members of our partner group and other senior executives.
Following first stage Committee approval, a formal Offer Letter will be issued and the SME will be subject to due diligence, covering all key aspects of the business including financial, legal and management referencing, as well as full market and commercial analysis.
On conclusion of this process a final detailed investment paper is submitted to our Investment Committee, summarising the due diligence findings and making recommendations. The decision ultimately on whether or not to proceed to legal completion of the investment will be made at this point. The end to end process takes on average 8-12 weeks for a debt investment and longer, say about 4-6 months for an equity investment.
6. What sort of corporate activity are businesses looking to finance?
SMEs approach Maven seeking finance to help them grow their businesses. For instance, investment in new products/markets, development capital to drive revenue growth, acquisition finance or funding for a management buy-out.
7. What sort of business ideas have been successful in the past?
Good ideas come in all shapes and sizes but success tends to be driven by a capable management team. Some of Maven’s most successful recent investments have come in businesses operating in traditional industries such as manufacturing where we exited Nenplas, a plastic extrusion manufacturer, achieving a return of more than 5x and Cash Bases, a point-of-sale cash management specialist, which delivered a return of over 7x.
We also find that successful businesses are often the ones that find a niche or have strong core characteristics such as a sector-disruptive business model which is capable of being scaled.
8. What do you look for in a business, what would convince you to offer them finance?
Maven has invested in both established SMEs of scale with annual operating profits in the millions, as well as in significantly earlier stage firms where losses are being incurred. The common thread across all of Maven’s investments is a strong management team with sector expertise or previous experience of growing an SME and the capability to deliver growth in earnings.
9. What tips can you give to businesses pitching? What makes a good pitch?
A knowledge of the market and competitive space is important; being able to articulate the opportunities and threats and how you plan to address these shows clear business vision.
Any investment proposal should also include comprehensive information on the company’s financials: historic trading performance, 3 years projections and details of the underlying assumptions on turnover growth, gross margin, overheads, and cash flow as well as outlining how the funding will be used.
Plus don’t forget to outline any aspirations around exit as this will help align investors’ interests with your own from the outset.
10. What are the advantages of equity finance investment over a bank loan?
One of the key benefits for SMEs is the advice and input they will gain from Maven’s experienced investment team. Maven’s portfolio executives work closely and collaboratively with each investee company, providing strategic counsel and operational expertise to optimise performance and ensure each investment fulfils its potential.
11. What are the pitfalls to watch out for, for small businesses seeking finance?
Bank debt remains the cheapest option for businesses seeking finance and should be explored in the first instance as a means of supporting working capital and/or investment funding assuming the business can meet the bank’s security needs and support the debt through adequate cash flow generation. If this isn’t a viable option then SMEs should seek some form of professional advice – there being plenty available either through public sector bodies or accountancy firms – who can explain the different forms of alternative finance available and provide help in preparing a suitable business plan.