Published: Feb 28, 2020
Focus:
Insights
When raising your first equity investment, most advisors or funders discuss what to include in your pitch; however, simply following all of these recommended elements does not guarantee a successful fundraise. Rather than add to the library of recommendations, we will consider what could likely put an investor off to ensure your plan is more likely to succeed.
James Darlington, Investment Director in Maven’s Manchester office, sets out his thoughts on what is likely to put an investor off financing your business proposal.
A ‘me too’ business
Investors want to see USPs and market differentiators therefore their appetite will be detracted if these cannot be identified. The concern with a similar product or service offering is that these businesses will require significant investment to upscale rapidly to ‘catch up’ to the market leaders. In order to attract an investor there would need to be clear evidence of an ability to gain rapid market share and win clients from competitors whilst managing a high cash burn.
Minority shareholding for senior management
The concern here is the management team who are leading the business are not incentivised to drive growth, and therefore shareholder value, given they have little to no participation in the upside return. Investors like to see businesses where management have a meaningful shareholding as this provides them with more motivation to drive their personal shareholding, thus increasing all shareholders value. Where a founder has personally invested in the business in its early stages is also an added positive to investors.
Unproven management team
A strong and experienced senior management team is a key criteria for any equity investor. A business that is led by an inexperienced team will inherently cause doubts to the potential investor as they cannot corroborate against previous ventures. Some high level concerns will be around the team’s ability to achieve the sales forecasts, be able to manage cash burn effectively and execute the recruitment plan etc. This can be partially mitigated by strengthening the board with NEDs and/ or advisors who have experience in successfully growing and exiting equity backed businesses.
Weak financial model and business plan
Investors will be deterred by a vague financial model with unverified assumptions making it difficult to rely on and also to perform the relevant analysis. Investors also don’t want to see a business plan that is lacking information or that makes unrealistic assumptions. A sensible growth forecast based on market analysis, funding utilisation and current growth performance is more credible and likely to attract investment.
Large cash burn
Investors typically want to see their investment provide a minimum of 12-18 months cash runway so the business has sufficient time to scale and prove out the business plan; therefore, a large and rapid cash burn it is likely to discourage an investor.
If you’re looking for investment to grow, Maven manages a range of funds that can support business growth across multiple sectors and funding scenarios. Contact Maven’s local team today on 0161 233 3500 to find out more.
