Most businesses will need some sort of funding to keep moving and expanding, beyond the essential effort of revenue generation. Financing, whether through lending or investment, provides the capital necessary to grow the business, expand into new markets, or prepare to shift from private to public. Although there are many approaches that businesses can take to achieve funding, focused practices can often yield better results. With these tips, business owners can better position their funding rounds for success.
Outline a Clear Business Proposition
Almost anyone who makes some kind of investment in a company wants to know what the business does and how it rises above the competition. Creating an effective business plan starts with a compelling financial narrative describing the initial proposition. To address potential investors’ questions, business owners should consider outlining answers to the following:
- What does the company do?
- What is the business’s chief value proposition?
- How does the company meet an existing need in the market?
- Which demographics are likely targets for the business’s products and services?
- How does the company reach those potential clients?
Explanations should be fairly clear and concise. If the proposition is difficult to explain, investors may struggle to see its value.
Implement Internal Teams and Infrastructure
Even for a startup with only a few employees in the company, investors expect to see clear definition of roles and expectations for each stakeholder. Business owners should assign roles for the following functions, even if some are outsourced:
Although having a point person for each of these areas is critical, it may not be sufficient to prove that the company will be able to manage its responsibilities. Creating infrastructure to promote cross-team collaboration and streamline data management can make it easier to handle a large workload with a small team. Tools such as finance reporting software can simplify the process.
Be Strategic About Offerings
When evaluating an investment, especially a new one, investors assess what they get in return. Company owners may be tempted to give investors the world in order to secure that investment, even if they will soon regret the generosity. In contrast, businesses may also restrict their offerings to the barest minimum, providing little enticement for investors to opt in.
Companies should compare funding rounds of similar businesses, particularly competitors, to get a sense for the ideal balance between necessary perks and compromised control. For example, a business may choose to offer options to investors, which dilutes the founders’ equity, in favor of being more selective about offering board seats.
Identify Target Investors
Every investor is a little different, which means that tailoring the pitch to the right investors is more likely to improve the outcome. Some investors prefer to work with companies that have a few years of growth behind them, while others are happy to put money into a promising startup. Businesses should look for investors that have the following qualities:
- Experience in investing in businesses with similar levels of development
- Familiarity with the industry’s needs and challenges
- Interest in collaboration, especially for the first few investors
- Connectedness to the investor community, particularly to like-minded investors who may also be interested
- Reliable track record with investments, especially those where the investor provided mentorship
A well-known financial backer with a great history can help drive more investors to the business.
Demonstrate Strong Financial Projections
Because many businesses fail within the first few years, investors want to have some surety that the company can survive its likely challenges. Proving financial sustainability requires extensive financial projections and modeling to show how the company plans to survive challenges and grow over time.
Businesses can use financial reporting from competitors or companies in adjacent industries to understand the types of modeling they will need to provide. Financial software can use AI to generate accurate projections that show how the company succeeds.
Ideally, financial models will provide prospective revenue, expenses, and profits based on a variety of scenarios, broken up by quarter, over a period of a year or two. Investors want to know that the business can stay afloat and respond to supply chain instability, geopolitical misalignment, or sudden changes in priorities of the target consumer.
Define the Timetables
Even if the funding is intended to help support the company’s establishment and growth over a period of several years, investors want to know that the business has a clear plan for its use. Companies should present a detailed budget and timeline that connects funding directly to revenue growth or other indicators of sustainability.
If the company plans to use multiple funding rounds to finance expansion or build funding for a merger or acquisition, the business should clearly outline the use and timeline for the money coming from each round. This effort helps to establish the necessity for future funding.
Perform Detailed Due Diligence
All this detail ultimately needs to go into a package that outlines everything for the investor. Prospective investors often want to dig into the fine print, and there they should find:
- Certificates of incorporation
- Detailed business plan, including financial projections
- Contracts with vendors and service providers
- Largest customers, especially those with contract commitments
- IP assignment agreements
- Confidentiality and Invention Assignment Agreements
All documentation should be reviewed by financial and legal advisors to confirm that the details are accurate and compliant with regulatory authorities.
Funding is a critical aspect of running a successful business, and many owners will need to obtain funding multiple times in the first few years. Securing funding through investment can be an effective way to drum up interest in the company, while providing access to capital for operations or expansion. By following these best practices, business owners can avoid some of the common pitfalls and put their companies on a stronger footing for the future.
AUTHOR BIO: Marcie Clark is the Director of Regulatory Services for Donnelley Financial Solutions (DFIN). She is a seasoned subject matter expert in SEC rules and regulations with experience navigating complex compliance landscapes. Clark plays a key role in ensuring organizational readiness and alignment with evolving SEC mandates.
