Have the right product
1 “If I am looking at a start-up opportunity, I’m looking for something unique, not a me-too idea,” Nenad Marovac, a managing partner at DN Capital, a venture capital fund, said. “It will be a product that will save people a lot of time or a lot of money.” It needs to appeal to an American market: “We do not invest in anything that does not have a global element.”
Know your business
2 Start with the right pitch: “You need to be able to communicate clearly, in three minutes max, what it does and what the benefits are,” Jayne Chace, a venture partner at MTI, a venture capital firm, said. You also need to have deep, thorough research about your market for the subsequent question-and-answer session; saying that you don’t have any competitors will make you look unprepared or ignorant. “And be realistic about how much [money] you ask for — but don’t ask for too little, either,” she said. Things are likely to be more expensive — and profit margins tighter — than you expect.
Be clear about exit strategy
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3 Do you plan to sell the business or float it? “The investor will want to know how and where they get their money back,” Ms Chace said. “Venture capitalists want 10 to 15 per cent return as a minimum and they want it in four to seven years.”
Don’t dilute your equity
4 “Before you go to venture capitalists or business angels, make sure that you have added as much value as you can through other sources so that you can sell your equity at a higher price,” Teri Willey, the chief executive of Cambridge Enterprise, a subsidiary of the University of Cambridge which helps academics to commercialise their ideas. Several government bodies, including research councils and regional development agencies, offer funding; a number of universities and other organisations run business plan competitions that offer advice as well as cash prizes; and friends and family may invest. Revenue from the business itself may also contribute, but banks are generally less keen to get involved than in the past.
Network
5 This does not mean approaching people at events and cornering them with your idea. “You need to engage with investors like you would any normal human being,” Darrel Connell, a manager at Gateway2Investment, an investment readiness programme, said. The goal is to get a business card and an invitation to discuss things more formally in the future.
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Get the right people on board
6 “If investors do not like your management team, they won’t invest,” Mr Connell said. If you do not have experience building a business in this field, find someone who has and bring them on board; having an established entrepreneur acting as a business advisor will create a good impression. “Investors will think of it as a sort of quality assurance that a successful entrepreneur wants to invest time in your business,” Mr Connell said.
Put your own money in
7 “We want the management team to have a meaningful stake in the company,” Mr Marovac said. “You don’t have to get them to remortgage their house but we need to see that they are willing to put their money in, too. They need skin in the game.”
Consider an angel
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8 “If you are looking at £50,000 to £1 million, I would focus on a business angel,” Mr Connell said. Business angels tend to bring a more hands-on approach than venture capitalists, which means that they can also provide valuable experience and a useful network of contacts. Perhaps surprisingly, the recession does bring some good news here; with property a questionable investment and bank interest negligible, some rich individuals are looking at becoming business angels instead, and the less experienced they are the greater the chance you’ll get a good price for your equity, Mr Connell said.
Look at venture capital
9 Be aware that the credit crunch means that you’ll need to be more developed than in the past to catch investors’ attention. “At the moment, venture capitalists are seeing a lot of later-stage businesses with a turnover of £1 million to £5 million and getting them for early stage prices,” Mr Connell said. “These are businesses that would normally have gone to a bank for a loan.”
Back the right deal
10 “Look at all the different options, how much money you need and what you have to give up in each case,” Ms Chace said. Don’t make yourself personally liable financially or tie yourself to people with whom you do not feel a strong, positive connection. And look at the small print, whether you are signing an investment contract or you are accepting a grant, Ms Willey said. Funding from a regional development agency may require you to repay the money if you were to move your business to a different area, for example. “You need an advisor on your side, who can take you through what the clauses are and what they all mean,” she said.