The Investment Handbook

The Essential Funding Guide for Entrepreneurs

David Bateman

• Publisher: Legend Business
• Year: 2019
• Print ISBN: 9781787197909
• eBook ISBN: 9781787197893
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

The all-you-need-to-know guide to Investment. The yearbook is packed with practical guidance on who to contact and how to get investment.

The Investors Handbook is a comprehensive directory of venture capital firms, start-up investors and angel networks. Essential for any individual or business looking for investment, it will help entrepreneurs and business owners navigate the often complex world of sourcing finance.

One of the main reasons start-ups fail is a lack of access to capital or accessing capital at the wrong time. Whatever stage a business is at, this book will help entrepreneurs and business owners understand and source in areas such as:

• Directory of investors
• When to fundraise
• How to meet investors
• Best people to connect and network with
• Pitching your ideas
• After and beyond investment

A must-read book with contributions from investment experts David Bateman, Eileen Modral and Jonathan Reuvid.

David Bateman, is a successful entrepreneur and has founded several businesses. He is an active investor and has spoken at many leading events and at university business schools including Oxford, Cambridge, Harvard, MIT, Wharton and Columbia.

Eileen Modral, is an Investment Network Manager at Oxford Investment Opportunity Network (OION), one of the UK's most well-known and established angel networks.

Jonathan Reuvid was formerly an economist for French oil company Total, and later an entrepreneur. He is a published author of a range of business titles, and was writer and editor for of 'Managing Business Risk', and 'The Investors Guide to the United Kingdom'.

PART ONE

PREPARING TO APPROACH
AND MEET INVESTORS

1.1

WHAT INVESTORS WANT IN RETURN

Jonathan Reuvid

Careful study of investors’ profiles and the businesses in which they have invested recently will give you a clear idea of the niche areas to which they are attracted. It will also indicate the scale and nature of funds they commit to individual enterprises and the equity participation they are looking for. All investors are risk averse to the unfamiliar and if your venture falls outside their broader fields of interest and experience, it is unlikely that you will attract attention.

However, before attempting to identify specific investor targets it is important that you understand the common requirements and preferences that all investors are likely to have so that you may structure your investment proposal and subsequently pitch accordingly. They fall under the following broad categories:

• Presentation and initial contact

• Pitch and preliminary discussion

• Growth and scalability of business

• Management capability

• Detailed Business Plans

• Risk / reward assessment

Only when the investor is satisfied on all six counts will more detailed discussion take place leading to negotiation of terms and ultimately a Term Sheet to be approved by all parties which will form the basis for detailed documentation and due diligence.

Before discussing the likely structure of any investment deal that may be on offer, let’s review in turn each of the six requirements.

PRESENTATION

Your first objective is simply to attract investors’ attention sufficiently so that you are invited to attend a meeting to make your pitch and hold a preliminary discussion. The most effective way to make your approach is an email to the potential investors you have selected enclosing a PDF of your headline Business Plan. Be sure to follow the seasoned advice in David Bateman’s book Business Plans that Get Investment; the nub of his advice on constructing your plan is to follow the familiar KISS dictum: “keep it simple, stupid”.

As David emphasises, most professional investors receive up to 100 approaches with Business Plans every week and most of these end up in the bin. To gain attention your Plan needs to be clear and concise, delivering its message and your core proposition within the first five minutes of reading which is probably all the time that an investor will give to their first scan. A confused message with a jumble of secondary detail and a lack of structure, however well written, will be fatal to further reading.

The structure which David advocates is a package of no more than 14 pages arranged and titled as follows:

1. Executive Summary – An overview of what is to come.

2. Opportunity – What problem or gap in the market your business addresses.

3. Background – The product your business makes or the service it offers.

4. USP – The Unique Selling Pont (USP) that makes your business special and different from others.

5. Progress – The progress you have made in developing your business and its current position, including any successes to date.

6. The Market – The identity and characteristics of your customers.

7. Route to Market – How you plan to access and sell to your potential customers.

8. Competition – Who else does what you do or something similar.

9. Management – Who runs the business and what is their experience and knowledge of the sector.

10. Business Model – How the business makes money, explaining the manufacturing cost of the product, or provision of the service, through to the proceeds from actual sales.

11. Financials – Current and future sales, costs and profits.

12. Investment – How much investment you are asking for and what you plan to do with it.

13. Exit – How the investor will get their money back from their investment and generate an additional return.

14. Conclusion – A brief synopsis of the plan, similar to the Executive Summary but finishing on a ‘high note’ with the most favourable points.

For the structure of each page bullet points are recommended with no more than six bullet points on each page including the financials. A template is provided on the website www.businessplansthatgetinvestment.com to which purchasers of the book have access in PowerPoint landscape format as an exemplar for any Business Plan.

When writing your Business Plan, be aware of the criteria that investors who persist in reading beyond the first five minutes will apply. And here it may be helpful to differentiate between the three broad categories of equity investor, not rigidly compartmentalised, who are business angels, venture capitalists and private equity.

• All three often, though not always the case with private equity, start out with the general expectation that no more than 30% of their investments will be successful. Therefore, they look for high returns from those that prosper. In venture capital, the rule of thumb is that only 10% are winners.

• Most business angels and venture capitalists aim to exit their investments within three to four years. Larger equity funds may take a longer view. However, take four years as the norm for the time period of your planning.

• Before clinching a deal you will need to demonstrate ‘proof of concept’: that your product or service has a market, is commercially viable and will make money.

Angel investors are usually businesspeople who have often started successful businesses which are the basis of their wealth and who favour early stage businesses. They may be keen to offer expertise and experience to the start-ups in which they invest. Individually their personal investment may be a little as £10,000 and is unlikely to exceed £100,000. They tend to hunt in packs through managed networks such as the Oxford Invenstment Opportunity Network (OION), which forms a new investment company each year in which individuals invest as a syndicate to take advantage of the government’s Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) offering relief from Capital Gains Tax (CGT). There is a preference by such networks for innovative high-tech businesses. Early investment equity funding by angel consortia is most suitable for companies seeking from £75,000 to £250,000.

Venture capitalists are focused on companies that already have some track record. They are professionally managed investment companies in their own right and are probably more demanding than angel investor syndicates in terms of Business Plans and management team capabilities. They like to offer funding packages in excess of £250,000, which minimize their risk exposure by providing at least part of the investment in loans or most of it in preference shares with only a small proportion as unprotected ordinary share capital.

Private equity funds also encompass the larger investment companies that provide multi-million pound funding and sometimes involve themselves in supporting acquisitions and corporate rescues.

PITCH AND PRELIMINARY DISCUSSION

Your initial pitch was your Business Plan and, if it did its job successfully, it will elicit invitations to meet and discuss. But do not expect that responses will be unsolicited. Prepare yourself for telephone follow-ups after one week to all that have not sent “thank you but no thank you” replies to your email. Verbal follow-ups are of crucial importance.

At your first meeting with a prospective investor expect to be questioned closely on all elements of your Business Plan and prepare accordingly. Have back-up information available as hand-outs but use sparingly, only where there is demand for further detail. However, the face-to-face encounter has more dimensions than cross-examination of the Plan. This is the investor’s first opportunity to appraise you personally and any members of your management team who attend with you. As well as satisfying the investor on your plans and your ability to carry them out, this is an opportunity to establish whether there is sufficient compatibility and the confidence to proceed further.

And the dialogue is a two-way street; it’s your opportunity to establish a basis of sufficient trust in the investor team for you to feel comfortable in continuing to talk. Before meeting again or exchanging further information you may be asked to sign a mutual non-disclosure agreement (NDA) in order to protect sensitive information or intellectual property of both parties.

GROWTH AND SCALEABILITY OF BUSINESS

Growth can result from general growth of the market in which you operate or from your increasing penetration of the market as a result of your business’s USP (Unique Selling Points). Investors will look for evidence of both.

“Scalability” is an attractive and often necessary condition for equity investment. This means that if your company operates in a market niche and has a Business Plan showing geometric growth rates its chances of securing investment are greatly enhanced.

MANAGEMENT CAPABILITY

Innovative brilliance, sound business strategy and thorough understanding of the market(s) in which you operate are all strong plus points in assessing management capability. However, they are not enough to convince experienced investors. You will also need to show that your management team has depth and has appropriate ‘been there, done that’ experience.

Young management teams have an advantage in terms of perceived energy and enthusiasm but you may need to add one or two older members, over 40, in supporting roles such as finance or, perhaps a non-executive Chair with an established reputation and connections. The executive management needs to be full-time without other work engagements. You also need to be aware that, from an investor’s viewpoint, ‘capability’ includes financial commitment. The core management team will be expected to invest significant personal funds for their shareholdings. The terms of the deal may include the provision of loan capital to management for their investments, sometimes secured on their personal assets.

DETAILED BUSINESS PLANS

The financials in the Business Plan that you have sent are headline numbers, confined to revenue, gross profit, net profit and net margins over four years with notes highlighting margins and growth and, maybe, references to bank debt and directors’ investment. As discussions progress you and your financial director will be required to provide much more detail in terms of revenue sources, variable costs, gross margins, overheads and cashflow forecasts incorporating all these elements

You need to have this information in your back pocket at the first meeting, but do not provide your spreadsheets until requested. You may find that more detail or projections for alternative scenarios are required.

RISK / REWARD ASSESSMENT

The degree to which an investor is risk averse will affect the decision to go forward and also the structure of any investment package that may be offered. The assessment of the risk/reward involved will be conditioned by past experience of investment in companies in the same or similar fields. The calculated investment return is a key determinant and each investor wil...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Introduction
• Part One – Preparing to Approach and Meet Investors
• Part Two – Directory of Investors
• Part Three – Down the Road
• Conclusion