There is a lot of money in the investment market looking for good businesses to invest in. There are also a lot of young businesses looking for investment funds.
The investment market strategy has been to encourage young start-up businesses to look for investment as the way to launch and build their offerings, putting aside the traditional route of early profitability as a way of building business success.
The availability of funds and an increasing number of new businesses have given the impression to the founders of these businesses that fundraising is an easy process. That for all businesses there is a money tree at the end of the garden that just needs a shake. Raising money is really hard and should be approached very seriously.
The truth is that all investors are looking to invest in good offerings, not just any offering. This often comes as a shock to the founders who, of course, will always have the confidence that their business is a golden opportunity for the investment community.
What are the red flags for investors and how do you avoid them?
Here are eight things to consider:
1. Investors will not put money into a company where the founders/management team are not aligned in their ambition for the business. Mixed ambitions around timelines and particularly exits always look like a stored up, expensive future problem. Make sure the senior team are all saying and aiming for the same thing.
2. Investors only care about one thing, their money and how much money they might make. Founders need to respect this and realise that this is the only measurement that matters to investors. Seeing the money as ‘your right’ is really a bad look.
3. Investors love well run businesses with good governance and proper processes. Even creative businesses need these disciplines. Make sure you have a good legal framework in place and implement board meetings and minutes as soon as practicable. Getting a good lawyer on board as early as possible should always be seen as an investment, not a cost.
4. Investors also like well-run finance systems within a business. Poor cash management and cash collection are not attractive. There are plenty of good, outsourced finance offerings out there at very reasonable prices. Like the lawyer, get your finances sorted early and see it as an investment
5. Investors will insist on doing significant due diligence before they invest. This is a deep dive into your business, looking at everything from finances to the management team. It can be a brutal process and is time-consuming, exhausting and distracting. A CEO I once worked with always believed that you should run your business as though you are always about to enter a due diligence process. What does this mean? It means knowing where everything is. With cloud-based storage easily available, setting up a data room with all the company’s legal, contracts, finance reports and more is easy and shows a sign of a well-run business. You will also know where everything is.
6. Investors hate it when targets are missed. When going through the fund-raising process it is easy to be seduced by the investor into setting targets that are at best ambitious and at worst totally unachievable. This is storing up a big problem for the future. You will get respect for setting targets that you can hit and pushing back on over-ambitious targets. My advice is always to make sure that the year-one targets are achievable without being soft.
7. Investors very rarely change deals after they have been agreed upon, and they only then do it if it benefits them. Do not expect to be able to go back after a deal is done and renegotiate. The answer will always be no, and it makes you look as though you weren’t paying attention. So, make sure that you understand every element of the deal and if you don’t, then get your lawyer to explain it. If you don’t like the clauses, push back. It is a two-way negotiation.
8. Investors really want to know what you want the money for. They are not interested in helping you manage your cash flow or giving you and the team a nice pay rise. The word investment is the clue. They want their money to take the business forward. To invest in new people or tech or marketing. They want to see a clear costed plan and if they invest they want that clear plan acted upon.
These are some of the things that investors don’t like to see when they are looking to invest. They really are not impressed by the founders who believe that they have a right to invest and then a right to spend as they want to, with no recourse to that investor. It’s not a situation that will be allowed to continue and there is only ever one loser.
Taking investment always changes the way a business behaves whether that is chosen or imposed. It is much better to take the lead and embrace the investor without being subservient. Look at your company through an investor’s eye and you will have a very clear view of what you need to do to get the money and help you need.
About the author: David Pattison is a start-up funding expert, business chair and mentor, and author of The Money Train: 10 Things Young Businesses Need to Know About Investors. The book has been shortlisted for a Business Book Award 2022.