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By Vasiliki Carson, 18 April 2014

5 things a start-up company should do before raising equity financing

EIS_Bank_Note-resized-600Over the years we have helped many of our clients successfully raise equity financing. Unfortunately, there are also those companies that did not raise required finance to get started. Every entrepreneur who seeks to raise finance for their business needs to increase the odds in their favour by removing as many of the investors reasons not to invest in their company, as well as, of course, increasing the reasons why an investor should invest.

Increasing the odds in the entrepreneurs favour.

To increase the odds, there are certain things an entrepreneur should put in place beforehand. 

It goes without saying that the business proposition should be a sound one, with a strong likelihood of financial success.  But there are certain areas that the entrepreneur should address to ensure that as many of the investors concerns are removed or addressed beforehand. The five key areas a start-up company should do are highlighted below.

1) Set the company up correctly.

The key here is to obtain SEIS or EIS advance assurance. By obtaining SEIS or EIS advance assurance you are reducing the downside risk to investors. 

For example, the SEIS tax relief will provide qualifying investors 50% income tax relief (EIS tax relief provides 30% income tax relief), so for every £100,000 invested in a company by a SEIS qualifying investor, £50,000 will be received back from HMRC by the investor. Consequently the net investment is reduced to £50,000. If the company was to only break even after a three year period and give back the investor the capital invested, being £100,000, the investor return will be a circa 18.9% per annum (or 34.4% to a high rate 45% tax payer). 

Any right thinking investor presented with two options, which appear equally attractive from a business point of view, would choose the SEIS option. The choice is between £100,000 invested now with the hope of getting a return in the future (with any future gains being subject to capital gains tax) or £100,000 invested now, with £50,000 back in circa six months from HMRC and tax free growth on the full £100,000 (i.e. no capital gains tax to pay).

For more about SEIS and in particular excluded trades read our blog post SEIS excluded activities and qualifying trades explained.

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2) Assemble the best team possible.

It is important to assemble the best team that you can access. Any start-up business will be judged as much on the business potential they are pitching as on the team behind the opportunity. We cannot emphasise this point enough. Having prior success in any way with a start-up company is an added bonus. Try to assemble team members that compliment each other. For example, it is important to have someone who really knows the target market and someone with prior start-up success on the team (might be the same person). Also important is a person who knows the numbers. Try to assess where your team is weak and appoint someone who can fulfill that role, even if they are appointed on a non-executive basis.

3) Know your market and competition.

You absolutely must know the market you are targeting inside out. So many times we come across entrepreneurs who are wanting to start a business based on their own hunch of what is required. It is important to do detailed market research before meeting any potential investors. If you have developed a prototype of the product, make sure you have gone out into the market, tested it and gathered hard evidence to ensure there is a real demand.

Knowing the competition is also important. It is not enough to say they cannot compete with you or that their product is not the same. A real understanding of the competition and the threat they pose is required. Being able to demonstrate your understanding is a must.

4) Be very clear about your business and the numbers.

There are endless numbers of start-up ideas out there in the process of raising equity financing. In reality a lot of them are not based on a sound business case but rather represent a hope to raise money and the belief that the business case can be worked out later on. To increase your odds of successfully raising equity financing you should ensure that you really understand the business and how it will make money as well as the numbers behind it. You have to really know the numbers. Really know them inside out. Nothing is more off putting to a potential investor than being pitched to by an entrepreneur that does not know their business proposition and the associated financials.

5) Be prepared for the long haul.

We come across so many entrepreneurs that give up too easy. To be successful at raising money it takes a lot of time and effort, coupled with the right approach and preparation. We often refer to the process as using a lot of "shoe leather" - going back and forward between investors etc. Of course it depends on how much you want to raise - £50,000 is easier to raise than £500,000, but even £50,000 can take a long time. Make sure you have put as much as possible in place before meeting any potential investor so that you can focus on positives of the business rather than spending time on what still needs done - at the end of the day - you are better prepared - or as we call it - "investment ready" - and that could make all the difference in an investor's mind.