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6 questions to ask to prep for your funding round

January 2020

For lots of businesses, securing funds is a real ‘hooray’ moment. And for others, it’s simply a huge relief. With 46% of UK SMEs hitting obstacles when trying to access finance, you may feel you’ve got a 50/50 chance of getting your hands on the investment you need. The pressure is on.

High stress and emotional tension needn’t come into it – and that’s where solid planning is so important. Here’s a run through of the who, what, why, when, where and how of your preparations for a funding round.

WHAT do you have to offer?

There are two main parts to this stage of fundraising – the valuation and the terms.

Getting the value of your business right is difficult, especially if you’re at pre-profit stage. You’ll need to think about total revenues, your revenue growth curve, the market niche, the number of customers you have and the strength of your business model. Full disclosure is essential here. Miss something out, such as a major loss, and you’ll lose your investor’s trust.

The terms of your investment offer also comes into the valuation. You need to make sure any dilution of shares doesn’t see you losing the value of your stake – in other words, your slice of the cake may be smaller but the cake itself will be worth enough to make your slice more valuable.

 

WHY do you need the investment?

This is quite literally what you’re going to spend. Breaking down how you plan to use the funds shows you’re serious and you value the investment. The breakdown could include costs like marketing, hiring, technology, product development etc. Be as specific as possible.

 

WHERE is your business going?

This is your chance to tell your business’ story. Show where you expect to be in six months, 12 months, 24 months and five years. It’s particularly important to build a compelling narrative if you’re going for start-up funding or seed funding.

It’s difficult to be specific here, but a cash flow forecast can really help. These calculations should show that the cash won’t suddenly dwindle. They’re generally more in-depth than those on a profit and loss statement, because they also include details of expected investment.

 

WHEN will the investor get their returns?

Tricky question. You can’t always be sure what’s around the corner, but you should have a good idea of when you’ll start generating profits to pay your investor decent returns.

It might feel odd to think about the end before the start-up funding has begun, but you will need to present the investor with a loose exit plan. They won’t expect you to have a valuation figure ready, but you should show you’ve thought about what the exit deal could look like.

 

HOW will you weather any storms?

Be prepared for any difficult questions about the trends, market and competitors that could all disrupt your business plan. Try to know your threats and weaknesses inside-out. You could also include examples of how you’ve overcome stumbling blocks in the past, which can be more assuring and impressive than having not had any obstacles yet.

 

WHO should I speak to about all of this?

You might be the one pitching your business and going after the funding, but you’re not alone. An outsider’s perspective is always invaluable and pretty easy to find.

An accountant who specialises in business valuations can make sure all your sums add up and help prepare you for questions about your finances and plans.

A lawyer will help you define the terms of your contract and ensure your interests are protected. They’ll also get your legal documents in place, so you can make your investment agreement legally binding when you shake hands.

 

A problem shared

Many of our Residents have experienced the challenge of funding rounds, and networking with people in similar situations is a great way of learning from their wins and mistakes. Why not come along to one of our upcoming events and mingle with like-minded people? You’re always welcome!