Sometimes, start-ups require a large upfront investment – particularly if new products are being launched. Business people like to see others investing in a company before they make a decision, so the first investment is always the most difficult.
Initially, the people investing in your company are likely to be family and friends. They’re not investing in your business, though – they’re investing in you.As the company grows, though, it becomes less about you and more about the business plan and how you’re doing things. Outside investors will start taking notice – so you’ll rely on loved ones less.
‘Angel investors’ are wealthy individuals looking to put capital into businesses. Often, you won’t get much time to persuade them that your business is worth investing in – so your pitch and supporting information need to be watertight. If they are interested and start asking pressing questions, you want to be able to give them the answers quickly.
Unlike on Dragons’ Den, a decision won’t be made there and then. More often than not, they’ll go away and conduct a rigorous due diligence check on your financial reports and commercial information. They may also want to meet the team and look at things from a legal standpoint. It is crucial you have everything in place before that scrutiny.
There are a number of tax-based schemes that entrepreneurs can call on to help raise finance and encourage investors. The Enterprise Investment Scheme allows people to claim back 30 per cent of their investment from the Government. This comes in the form of income tax they’ve paid in the UK over the last two years. After three years, they have no capital gains tax to pay based on profits that have come from their investment. They also get loss relief, which means they are only able to lose 50 per cent of their investment if the worst should happen.
Another thing to consider is valuation. A business will often start as an idea, which is difficult to put a monetary value on. When investors are looking to claim a share and no one really knows what the value is, be confident in your own judgment.
You will need to be familiar with the terms ‘pre-money’ and ‘post-money’. Pre-money valuation is what you think your business is worth now. You must consider how much finance you need and how much your idea is worth, as well as how much you are willing to give up for investment. If you don’t want to give much away, you may have to think about bootstrapping (stretching resources as far as you can) to create value.
Post-money valuation is what you think your business will be worth after investment. The idea is that once you have this capital, you can then grow your business. You will look at things like pricing and customers, so when you come to raise capital you’re worth more than you were to start with.
It’s all about balancing how much money you need, how far it will take you and how far you are prepared to dilute your share in the business. And remember: the fact that someone is offering you finance doesn’t mean you should take it. It has to work for you.