UK: Are You Fundable?

Adam Beard, CEO of corporate development consultants VenturePlanit, examines what makes a company fundable and discusses alternative strategies to the seeking of venture capital.

So, you’ve got a great idea, spotted a hole in the market or developed a new product or service that you know there’s demand for. It’s all very exciting, you’re feeling highly motivated and all you need to succeed is the backing. As Del Boy would have said, this time next year you’ll be a millionaire.

Ah, but that backing, where do you find it and what do you need to do to get it? It’s the fundamental part of the plan (you have got a plan, haven’t you?) and the biggest stumbling block to the realisation of most dreams.

So, lets get down to the harsh realities of getting a business funded. You can broadly split the factors that influence a funding decision into two, the variable factors that are a result of the market conditions prevalent at the time you seek funding and then the underlying principles that never change.

Firstly, lets examine the variable factors. In the late ‘90’s almost every investor was focussed on one thing, the Dot Com and technology boom. It was going to change the face of business, growth was going to be rapid and those who did not get in early were going to miss the boat. Investors were looking for quick returns, exits in 18-36 months. And, during this period, start-up’s were being funded at a rate never before seen. Most investors, as we know, got carried away with the hype. Some didn’t but were forced to invest in the sector by there own investors (yes VC’s have investors too, where do you think their funds come from?). Only a few, mainly British VC’s remained sceptical and stayed out of the sector. The point is, if you had a ‘traditional’ business most investors at that time were not interested.

Today, the reverse is true. Dot Com and technology sectors are depressed, the NASDAQ is down to a fraction of its pre 2000 levels. Investors are interested in solid, traditional businesses and are more likely to be looking for returns in 5-7 years. But, if you have a technology or Dot Com business you are going to struggle.

Investors want to put their money into established companies with good growth and profit potential. The start-up and early stage business is now unpopular. The world of corporate finance is fickle and, as with many other industries, the herd mentality is predominant. Add to the above business confidence, the state of the economy and how good the investor’s lunch was and you start to understand the variables that influence funding decisions.

So, lets assume you are in the right industry at the right time, you’re an established business, the economy is strong and the investor has just had the best meal of his life. Is investment going to be easy to obtain? In a word, no! Because now we come down to those underlying principles that do, or should, dictate all investment decisions.

In the world of property the first three considerations are location, location and location. In the world of corporate finance the first three are management, management and management. Management teams are the fundamental element for any investment so any company considering seeking investment needs to make an honest appraisal of its team and make plans to address any weaknesses. Have you got the full set of skills necessary to take the business forward? Does the team have the track record, particularly commercially, to convince an investor that they can deliver? Lets make one thing clear, investor back people first, businesses second and good ideas last. This applies to all investors, but particularly VC’s. And one more thing, even if the management team is strong an investor will still need to feel that they can work with the team so personal chemistry is also a factor.

Next, what is the growth potential of the business and what is its competitive, sustainable advantage? If you have a business or business opportunity where barriers of entry are low then the growth potential, that investors seek, may be limited or threatened by competition. Unless substantial ‘first mover advantage’ can be demonstrated a business will need a genuine USP if it is to interest an investor.

Who are these investors? Most people focus on VCs and ignore the other sources of funds – angels, banks, trade finance, mezzanine, corporate, private placing and public offering. These are not necessarily mutually exclusive. What is vital is to get the right funding for the right stage of a companies development in the right market conditions and under the right terms.

And, what about the plan? You have probably got a plan but does it contain all the information a potential investor will want, in a format that’s acceptable and, is it concise and easily understood? A business plan that is suitable for internal use within a business is not necessarily a plan suitable to submit to a potential investor. It needs to be written to meet the needs of the particular type of investor being addressed. Very few plans I see, even ones written by other consultants, are good ‘funding’ plans. More often than not the assumptions they contain have no validation (so how does an investor evaluate what he is being told) and they often fail to communicate clearly what the opportunity really is.

Communication is of fundamental importance, as all plans must pass the ‘Basingstoke test’. I’ll explain. A VC gets on a train at Waterloo with his copy of the Evening Standard. By the time he reaches Basingstoke he’s finished the paper and reaches for a plan from his case. If that plan hasn’t got his interest before he gets off the train in two stops time, its opportunity is lost. If your plan has been written by a financial or technical person it may not ‘communicate’. Plan writing is both an art and a science. Ignore either element at your peril.

Now, for the scary bit. Over 98% of all plans submitted to the investment community fail to secure the funding they seek! Why? Take any combination of the above and you’ll find your answer.

However, all is not doom and gloom. Despite all I said above, the technology start-up can still get funded today if the plan is compelling enough. Investors exist to make money. Any business with a genuine opportunity and, of course the right team, will gain consideration. And, if your team is incomplete today it may not matter as long as you acknowledge it and build in a plan to address it. Getting funded isn’t easy but, equally, it isn’t impossible either if you go about it in the right way.

But, if you can’t get funded what are the alternatives? Mergers, strategic alliances and joint ventures can all aid corporate growth. Often, such strategies are a better option than seeking investment.

Too many companies focus on a funding solution, missing opportunities that are easier to realise and may prove a lot less costly. The timing of funding in the development of the business is crucial to the value that will ultimately be realised by the founders. As radical as it seems, for some companies the best way to grow is by selling themselves to a larger, complementary parent. An alternative to sale would be to license their product. Corporate development is about thinking laterally and identifying the strategy that will provide the maximum benefit to the shareholders of the company. The best solution is not always the most obvious.