How can businesses prepare for investment-readiness?

18 July 2018 | Imola Antal

Investment-readiness is essential as it is the bridge that provides the financial and fundraising capability that investors and funders expect from entrepreneurs, thereby significantly increasing the chances of being funded. Entrepreneurs need to prepare before they approach investors in order to master their options and gain credibility.

The process of investment-readiness is about preparing answers to some of the essential questions investors will most likely ask from entrepreneurs in the pre-due-diligence stage. It is about researching specific investors, their strategies and understanding whether they are or not a fit. It also means understanding how to prepare proposals, pitch decks, investment teasers, financial projections, financial statements etc.

In 2018, in collaboration with The Ground_Up Project and The Investment Clinic, we organised GREEN-WIN dissemination workshops with investment experts and green entrepreneurs to address business model, fundraising and investment-readiness challenges. The following questions represent guidance for entrepreneurs provided by investment experts during these workshops.

How much funding should entrepreneurs raise and what should it be used for?

Concerning the amount to be raised, the advice is to raise as little as possible, but enough to keep the business going. The entrepreneur should be prepared and know that there is a typical type and range of funding applicable to certain business stages and going outside of that range will question the credibility of the request for funding. As an indicative benchmark the amount requested should cover 12 to 18-months of operation, meaning the amount of funds that are allowing the business to exist and continue to grow for the set period of time, with revenue calculations according to the worst case scenario.

When planning what to use the capital for once raised, priority goes to product development and market development, building the sales capability, the sales organisation, the infrastructure in terms of assets or people needed to grow the business at the given stage. The administration, salaries, management and overheads in general should be the last to consider from these 3 areas.

What signals are the financial projections sending?

In the presentation of financial projections, the minimum expectation is for entrepreneurs to be using the language and the tools the investor is used to see which must include an income statement, a balance sheet and a cash flow.

Revenue projections are considered expectations and ambitions of the entrepreneur and investors will apply their own expertise to assess the estimates made. On the other side, the cost calculations made by the entrepreneurs have to be accurate. If the numbers are unclear, it indicates that the management doesn’t understand the cost base which means a risk factor to the investor. The investors expect to see financial skills in the team, but the financial projections are the responsibility of the management team, not of the financial expert and the entrepreneur has to take ownership of these projections.

What should the entrepreneurs know about investors?

An entrepreneur needs to be clear on what an investment cycle means, because that’s the way to estimate the type of effort involved, duration of the process and define the strategy on the funding. Then the entrepreneur can start to prepare in more detail looking at particular investors he wants to target.

Research of public materials shared by the investor can provide answers to what is the expertise and what they are looking to invest in. The entrepreneur should verify if the investor at that time is in a funding stage, what is the size of funding, what is the timeline, and be aware that if the fund is fully invested at that time, then even if the entrepreneur has a great business case, they will not be considered for investment.

What do investors expect to see from entrepreneurs?

Investors are thinking in terms of risk, impact and return. The entrepreneur needs to minimize the risks that investors could perceive regarding a potential investment in the business, to present in detail and accurately the impact and to describe the revenue potential by providing a track record which is demonstrating that the entrepreneur understands the implications of investment in their company. If they previously raised some investment, the entrepreneur needs to explain how it was used, how they worked with the previous investors, how the investment helped achieve certain milestones and explain what is the next stage after the current funding stage, how will the company evolve.

How to reach out to investors?

There is a tendency for entrepreneurs to reach out to as many investors in any kind of event or competition. However, more meetings don’t result in more funding. Results are more likely to be obtained if quality introductions are made to investors who are identified to be a good match.

For this purpose, research is needed on the investors that can be approached, the businesses they have previously funded and their current preferences. In this process connections from incubators, personal networks and companies that received funding can provide valuable information. More effort in preparing and planning the fundraising approach will pay off in faster funding.

What should be the size of a pitch deck?

When sending the business information to analysts for screening it’s recommended to prepare a one-pager, a summary with some visual representation of the business model canvas, which should give an overview of the business in about 1 minute that will trigger their decision

In case the entrepreneur is invited to have a personal presentation, the pitch deck should have a manageable size and share only the most essential information, keeping it at maximum 10 slides.

The advice is to build the investment thesis using the sequence: problem - solution - opportunity - competition - business model – team – financials. It is also recommended to check some of the top pitch decks that have been successful in raising capital in that specific industry.

Too often, green entrepreneurs lack the financial literacy and preparation that will make them desirable to investors. Overall, it is common sense to invest – time, effort, research, expertise – in preparing for a fundraise. Investment-readiness will remain a key, ongoing process for any green entrepreneur, throughout all maturity stages of their business.