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In this presentation learn some key tips and strategies for ensuring your business is best placed for investment success.
Key learning outcomes:
Welcome to today's learning module on investor readiness. Today I'll be giving you some tips on how to ensure your business is best placed for investment success.
My name is Dianne Brown. I'm a chartered accountant and business advisor with SRJ Walker Wayland, and I'm passionate about educating business owners, such as yourselves, on the importance of planning for business success and working with you to ensure you achieve your growth and profitability goals.
Today I'm taking you through on some of the key components you need to become familiar with if you are considering taking on an investment source to help scale up and grow your business. This workshop will predominantly focus on early stage entities that are pitching for further investment.
For more mature businesses that are interested in exploring the different ways to exit a business, including selling all or part of your business, please refer to the earlier learning module, selling and value valuing your business that was recorded by Shaun Reeves from SRJ Walker Wayland and Tony Brown from Divest Merge and Acquire.
Through this presentation we will look at:
There are a lot of different sources of funding available.
Internal funding: Owners, Management, Employees, Banks
External investors: Shareholders, Government Grants, Supply Chain partnership, venture capitalists, grant funding
Angel investors: Affluent individuals investing in early stage enterprises, usually request equity or convertible debt, will need to “pitch”
ESIC Investment: Early stage innovation companies, tax incentives for investors, criteria will apply, Vitis <Link>
Venture Capital: Firms that invest other entities’ money in early stage enterprises ($50k+), usually request equity or convertible debt, “pitch” events
Private equity: Firms that invest other entities’ money for mature companies to innovate
Crowd Funding: Online platforms such a Pozible and Go Fund Me, Need “buy in” from your crowd, Cash contributions
Equity crowd funding: Ability to raise up to $5M per year, Up to $10K per investor per year <LINK>
What I do want to point out is that the information requirements of your pitch and your information memorandum are going to be similar for whatever source of funding you're applying for. However, the focus will be slightly different because the focus needs to be on what the fund is.
For example, if you are looking for investment in the form of a Government grant, the focus on your pitch in that area will be around Jobs and Growth, economic and community development, and your ability to deliver the project in the way you say you will.
If you're going for external investment through sophisticated investor networks, venture capitalists etc. then their focus will be on returning them investment. They'll also be looking at how much equity they will be receiving for their contribution, whether there will be any dividends payable to them. And what the exit strategy is for yourself and for them, and more importantly, your ability to deliver and do what you say you're going to be doing.
Regardless of which type of funding you're applying for all funders will be looking at comparing the potential return on investment versus the risk associated with that.
In terms of planning for investment for your company, it's critical that you engage advisor support early to ensure that you are developing the pathway for the value optimisation of your business. That means engaging with your accountant, lawyers, or specialists in various areas, but particularly around the areas associated with structured advice. It's important that you get your structure set up first and get it set up early to enable you to facilitate the framework for investment.
For example, if you're looking at equity investment, you need to be ensured that you're set up as a company structure. Uf you're thinking about safe notes or convertible notes, again, you want to be in a company structure. You could also look at whether you're going to issue units in a unit trust.
There are a number of different ways that you could structure your business to ensure that it's available to facilitate that extra external investment. You also need to make sure that that structure involves a consideration of the tax consequences, both for yourself, of the initial investment, and also potentially for your funder.
It's also important to consider the eligibility criteria for tax incentives if you can be classified as an early stage innovation company.
Additionally, you need to ensure that you have your intellectual property protected, and that means accessing IP advice early to ensure that you are safe and protected before you go any further in terms of your public investment requirements.
The first step in that process - in terms of getting your business investment ready - is developing your value proposition. This means thinking about how will you deliver value to both your customer and also to your funder.
Consider:
There are also five key questions to help you get started on your value proposition. Think about:
When developing your value proposition, you also need to consider any spillover benefits of your product or service. This would include things such as:
-Increased collaboration between businesses and research institution. For example, if your developing a Meditech device that's going to collate data from a whole range of patients from different demographics, what could potentially be done with that data? How could research institutions, such as universities and governments benefit from the data that your project or your product or service can actually obtain?
-Increased international profile for industry/market
-Diffusion of knowledge and skills that might be associated with your product or service
-Support for other industries e.g. using an Australian based manufacturer and therefore be in the supply chain and supporting another industry that's separate to yours.
Think about not just the key benefits to your business, but the spillover benefits to the broader economy in general.
It's really important when you're looking to grow your business and requesting further investment to do that, that you've clarified your market opportunity in terms of dollars.
That means looking at who is your demographic target market? What size that market is in terms of dollars.? If you're considering exporting, what is it’s size locally in Australia and what is it internationally? How your product or service is scalable to be able to tap into that market? What is the expected market share for your profit of your product or service in either the local or international market? You also need to consider if there any barriers to entry for your product and how are you going to address those barriers to entry?
There's a number of different resources that are available, that I've made available in the downloadable presentation to help you develop your skills on how to go about that market research.
There's also a great book that's available called the Mom Test Book. This book takes you through some of the key things that you might want to consider when asking questions or developing surveys to help identify and validate your market.
It’s critical to have some data around your market's willingness to purchase your actual product or service. Industry conventions are a helpful tool to ask people to respond with an expression of interest in your product or service. It might be collating some Facebook stats or survey stats, but, once again, independent verification is critical to ensuring that you can make potential investors feel more comfortable with the risk associated with investing in your business.
The next thing that you need to consider is your management capability. What skills and expertise do you, and those in your business, have to ensure that your project or your product or your service is a success in that particular market? What gaps do you currently have and how are you going to go about addressing these gaps?
One of the great ways that you can do this is to consider having an advisory board of people that are specialists in areas that can mitigate the risk associated with the gaps in your own capabilities.
Your execution plan is fundamental to ensuring your investor has comfort around the potential risk associated with investing in your business.
You should plan on including the following information in your execution plan:
-Business Strategic Plan: Make sure you have one, and that it’s documented and authentic.
-Business structure: Ensure it facilitates investment
-Project activity: Map out a project plan detailing how you’re going to achieve your forecasted growth include milestones, budget and deliverables.
-Financial model: Detail your sales cycles and your sales pipeline, what you sustainable margins are, and time until you achieve positive cashflow.
-IP Rights: Outline you intellectual property and how it’s going to be protected.
-Risk analysis: This will include mitigation strategies for identified risks.
It is important to consider the different exit strategies that are available. Try to analyse the pros and cons of each, and include this in your execution strategy.
In terms of valuing your business; in order to determine the amount of the funding or capital contribution you require, there are a number of different methodologies available.
As mentioned earlier in the presentation, there is an entire learning module focused on valuing and selling your business that you can watch HERE. So we won’t go into too much detail in this presentation other than to say for existing businesses or mature businesses, the return on investment is based on their future maintainable earnings that are based on how well they've earned or how well they've performed over the last number of years. For early stage companies it's based on the potential of your future maintainable earnings.
So we come back to the importance of the nailing your financial model, your financial assumptions, and outlining your path to positive cash flow.
When you are looking for investment, you are going to be required to do two things.
One is pitch for that investment. That might be in a number of different forms, and we’ll come to that later. The other one is to map out your equity requirements or your funding requirements in what we call an investment memorandum. For both of those components, there are 10 elements that all investors want to say.
They want to know that you are passionate about what your do, and that you’re passionate about making your business a success. You will need to demonstrate commitment, experience and the right synergy, so one of the key things an investor will look for is YOU and how you perform in your business and your pitch.
The second thing they're going to want to see is the value proposition. They want to make sure that you've clearly articulated how you have identified a need, and solved that need in a unique and new way.
They want to make sure that your intellectual assets are protected and that they're differentiated from what else is available.
They want to make sure that they're comfortable with your financial assumptions and that's linked to your market and your customers. Are you correct about your market size? Who your customers are and where they are. What are the barriers to entry? What competitors are already in the markets and how is your product different to those? What is the potential market size in terms of dollars for your product or service?
They want to make sure that your business is structured correctly for investment. That means looking at the beginning company unit trust, but for most of the situations, you're looking at equity investment, which means shares. They want to be aware of the different share classes and voting rights that are attached to that. They want to know about the future dissolution of ownership. Are there going to be any additional equity contributions that might dissolve their unit hold or dilute their shareholding in that particular company. They want to know how you're going to structure the contributions. Is it going to be convertible notes or safe notes, which is a simple agreement for future equity.
They want to know that your growth is achievable. Is it initially a rapid growth or a more staged growth? They want to see that you have a clear strategy and the pathway to achieving that growth. Nine times out of ten, they also want to know, what's the international vision for this company.
As covered earlier, the financial model is very important for external investors. They're also looking for the potential tax benefits. It's going to be more likely to be attractive to an external investors, such as a venture capitalist or a sophisticated investor, if they're able to access tax incentives through the early stage investment scheme.
They're also looking for a strategic fit. How would the investment they're going to make in your business fit within their existing core business or portfolio?
They want that exit strategy. Outline that pathway for return on investment. How are they going to get their money back? When are they going to get their money back? What is your plan for them to get their money back and what their return is actually going to be?
Finally, they will want hard data, and independent verifiable evidence.
In your pitch for investment, you need to be addressing each of those 10 key characteristics. Usually in terms of a pitch, you will want to have a PowerPoint supported by a detailed investment memorandum.
There'll be two key documentation requirements that you're going to need. I've provided a link in the downloadable presentation to some pitches for some startup companies - before they became famous.
This gives you some really interesting background information and it shows you the pitches that companies like Uber and Airbnb made to get their initial equity funding, and be able to scale up their businesses to the multinationals that we now know are available.
I hope this information gives you see some insight in ensuring that your business is best placed for investor readiness.