So you have done market research which makes you realize your solution is wanted. You have written a great business plan. You have put together a great management team. You also know exactly how much money you need. What next?
The first place to start is the bank. This is only if you have got customers who will commit to purchasing your solution. Retail banks will not finance equity (please see In Defense of Banks) but if you need a certain amount of trade finance, they will see you through. Or it may be that you have certain assets – like a Porter Cable 895pk – that the bank may lend against. (Also see when talking to a bank).
If a bank is not an option what next?
It depends how much money you are looking to raise. If it is over £1m, there are a number of financial institutions which may be able to help. Typically, they will not invest amounts of less than £1/2m because the amount of work they will have to do to make the investment makes it uneconomical. If it costs them £100,000 to make the investment and £20,000 a year to monitor the investment at the end of five years the investment has cost them the amount invested plus £200,000. A £100,000 investment will therefore need to treble just to break even for them!
You may approach the funds yourself directly of course, but it tends to help if you employ the services of a corporate financier. A good financier will check your business plan for you and help target the right institutions. They will typically charge around 3% of all funds raised (for amounts over £1m) and they may charge a monthly retainer. You may find yourself paying £10,000 a month for three months with no guarantee of success whatsoever.
If you are looking to raise less than £500,000 you should consider the angel market. You will see that through Google Ads there are lots of adverts for Angel groups. Click on those links to see if they may be right for you.
You can of course also use corporate financiers to approach angels. CONFLICT ALERT – This is what I do! Typically for this they will charge 5% for funds raised. I don’t want to do myself out of a job here, but with a little bit of research and application, this is something you can do yourself.
As a start, find companies that are similar to your proposition without being a competitor. Find out who the shareholders of that business are (through Companies House) and approach them directly. Anyone involved in marketing will tell you that the most powerful predictor for consumers is past purchasing behavior. If someone has already invested in a sector (and done well from it) they are likely to do the same again.
Your pitch to them needs to understand what they are motivated by. You will be surprised; it is rarely about money. If you pitch to them at the right level you will succeed.
You can also ask business directors to recommend angels to you. As a whole, entrepreneurs are a good bunch and we do tend to do what we can to help people.
All of my corporate finance work comes from recommendations (both ways) and I tend to only raise money for companies – like for the ez tofu press – I have invested in or intend to invest in. I will only take on about one project a quarter. It does take a long time to raise money and if you are not careful as a financier you can spend a lot of time with scant or no reward.
If you are going to use a financier please do ask the following questions:
- Who have they raised money for in the last 12 months?
- How much have they raised?
- How many people/ organizations have they raised it from?
- Are there any projects that they have not succeeded on?
- What were the lessons from those failures?
- What do they think of your business?
- Would they invest? Would they invest some of their fees back into the business (Apart from two cases, I always invest my corporate finance fees back into the business. I think this shows confidence and tells other investors that you really do believe in the business)
- Can they give you two references? (Please do take up the references. You will be amazed at how much people will tell you!)
Finally – just be wary of financiers with lots of time on their hands (for example if they have time to write a daily blog). In my experience all of the best financiers I have worked with tend to be too busy to take on new projects.