What do funders look for?

A question at the forefront of every entrepreneur’s mind when applying for funding to grow their business is: “What are the funders I’m approaching looking for in a new opportunity?”

Michael Dickens, Investment Manager in Maven’s Durham office, looks at what funders are seeking when investing in or lending to a small to medium sized business and sets out a list of factors to fine tune within your business before you begin your funding journey.

Every funder is different, and each has their own set of criteria in which they measure up the businesses they review. Some may base their decisions purely on the facts of past performance, others might be more inclined to factor their feel for the people running the company into the equation. Some may be inclined to take a risk and back an early stage business, others maybe be more risk averse and concentrate on assessing past financial performance of established organisations to formulate their investment decision.

However, there are certain factors almost all finance providers apply when evaluating new funding opportunities and it’s in your best interest as a business to ensure you fulfil these factors before approaching a funder with your pitch and business plan.

Fine tuning 3 important areas funders look at when reviewing an application for finance can improve your chances of a successful fund raise:

Management team

A strong management team is a key driver in an assessment of what makes an attractive funding proposition.  The saying ‘people do business with people’ applies here, the quality of the management team, and its ability to build a collaborative relationship with the funder, is of the utmost importance in an assessment of a company’s ability to be ‘investment ready’. In particular, a proven management team which has the relevant sector experience and is not overly dependent on one person is highly appealing as funders often seek teams with clear potential for growth who want to develop professionally. So, ask yourself, and indeed your team, do we have a set of complementary skills that can drive this business forward? Do we have a proven track record of delivering results for owners and investors alike? Does the team work well together, is there chemistry and do we complement one another’s skillsets? It's important to highlight as many of these strengths as possible in a funding application.

Finances

A company’s historic, current and forecasted financial performance will be reviewed in-depth to understand the scope for potential future growth. Your company’s financial projections should demonstrate how you anticipate your business growing, and how it will pay sufficient funds back to an investor to justify the risk taken to secure the original investment or loan. Business plan financial projections should be both optimistic, logical and realistic, based on research and experience rather than wishful thinking. This will allow the funder to understand the business’ key metrics and growth assumptions.  Are these assumptions realistic, achievable and what are the rationale behind these? You must back up your numbers by sharing your assumptions and the reasons you expect your forecasts will be achieved in the future.

Market

Funders are often looking for a business opportunity operating in or about to enter into a market with significant growth opportunities. The market the business operates in cannot be too small or niche so that the growth assumptions are then not reliable. Not every product or service is going to have a global market, but a finance provider is likely to want to see a business operating in a large enough market where the economies of scale can offer the potential to increase profits and margins.  Generally, any market share you achieve is coming from some other direct (or indirect) competitor therefore your competitive advantage must be demonstrable. Funders look for evidence your market potential is big enough to make financing your business opportunity worthwhile. They will also look for features in the business that make the company unique and give you a competitive edge, whether that’s existing contracts, relationships, knowhow or intellectual property protection. It’s important to outline existing customers and the revenue they have generated, highlight new business or contracts won and include a sales pipeline to help a potential funder understand your company’s market traction.

Finally, it’s is never too early to speak to a funder if your business is actively seeking or considering finance in the future. Maven’s investment team are more than happy to discuss your business and its prospects to help you understand how we might be able to help or signpost you to the most suitable source of support.