Welcome to part two of our series into getting investment ready, part of a series of blog posts that act as a reflection on the lessons learnt on T-DEB. Part one covered most frequently asked questions by investors, which can be read here.
In this second post we cover the foundational steps needed as you begin your investment journey: setting your core company purpose and values that guide your business strategy and your cash situation. We also briefly cover some of the types of investment options.
Pre-exploration: knowing where you stand, where you want to go, and how
Before the journey for investment begins, a company leader and their team must know and embody their core purpose and core values because these underpin your company’s strategy and its execution, including how you grow financially and invest in people. You should be able to answer the fundamental question Why?: “Why does what we do matter, what difference are we making in the world?”
Core values are the rules and boundaries that define and guide a company’s culture and personality. Company values are not generic platitudes; they provide a clear “should / shouldn’t” test for all the behaviours and decisions that everyone in the company makes e.g. “Should we pursue this contract?” “How should we address this client issue?” “Should we approach this investor?”. Discerning core values is a process of discovery and continuous learning; company values change as the company adapts and grows. For more on business strategy including core purpose and values, read Verne Harnish’s Scaling Up.
Having core purpose and values also allows you to tell your company story: its beginnings, what it stands for, what it aims to solve, and why. Stories grounded in your core purpose and values also help you and your team convey (to yourselves and others) the direction you want to go - and this includes investment but also recruitment and development of new competencies - how you put money to work.
As part of working through your business strategy you will develop a business plan (grounded on your core purpose and values), which will help you define your targets (3-5 years - where are we going), goals (>1yr - what are working on), actions (quarterly - how are we working), accountability (who is accountable and when?). There is no right or best way to write a business plan. Business plans - like business strategies and businesses themselves - change over time; read, read, read and get inspired to create your own plan and strategy - one that fits your purpose and values. See a list of influential business books from the Business Insider and from the Book Authority. You can also browse this step by step template for writing a business plan for your startup.
Your business plan will also outline (and therefore acknowledge) the demands on your business and how you balance them: on the one hand, the demands from people (building and maintaining reputation with staff, clients, and shareholders) and on the other, the demands stemming from productivity processes (how you make, buy, sell, track all transactions, etc.). Your plan will include your top priorities, how those are set, and the data that you will gather to help you track, on a continuous basis, that you are on the right path and gaining traction. Your plan will also outline how you drive yourself and your team forward (e.g. coaching, training, team building, adoption of new/different technologies, etc.).
With all of the above worked out, your plan will help you outline your cash situation. As Harnish puts it: “Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?” Recognise the old adage that “to make money you must spend money”. You will need to ask yourself “What are some of the innovative ways that we can generate sufficient profit and cashflow internally to create a sustainable business?”.
This will help you determine alternative ways forward that match your business’ core purpose and values: can you tap into existing resources or open up a new market opportunity? Read Kim and Mauborgne’s Blue Ocean Strategy. Exploring cash questions from this perspective will also help you answer whether you need or want to get a loan and how much, or how much time you can afford on writing grant applications, or if you want investment, what type, and what it will mean for your business.
In practical terms, constructing a GANTT for your business targets, goals and and actions will also help you identify crunch points and where cash injection is needed (e.g. more staff, equipment, trails, etc.). Read widely and understand the regular terms - e.g. EBITDA.
Turning back to investment... pitching and storytelling
It must be recognised that investment is more than just money. For some companies, it may also present the opportunity to be joined on the board by a mentor or a well-networked person - someone that can provide a fresh pair of eyes, new ideas, new insights. The level to which each investor brings these skills is different, and their strengths in each sector may vary.
Companies must consider the wider implication of receiving investment: what they have to give to an investor to get them onboard. As noted above, writing a detailed business plan is a key part of this. Alongside this, if not undertaken already, market research should be done to understand the market and potential of your product/company to create a new market. Based on your company's cash analysis you will be able to know your burn rate and target profit, and therefore how much cash injection you require. It will also help show the strength of your idea. If you have opted for investment, your company’s cash analysis and market research will help you convey how much investment you are seeking and how best to pitch for it.
In understanding one’s own company, it is important to understand the narrative of the company: your core purpose and values and how these stem from its history and have guided your trajectory, including the milestones passed, and the milestones still to come. This is at the core of preparing pitch decks. When pitching, you are telling a company story. And when it is rooted in its core purpose and values, you really do not have to ‘sell it’. Investors are first interested in ‘Why?’ - everything else stems from that and comes second. This advice may seem common sense, but in our experience we have noticed that too many companies are not able to answer ‘Why?’ and tell their story.
Investors are also interested in your company’s team: who is on your team and what have they done before? As part of your storytelling, you will tell them if your team members have built businesses and how they did it. Entrepreneurship is a story of success and failure, so even if you have failed before, it's good to present this to an investor in terms of what you have learnt from these experiences. Seeing that you have learnt the lessons of your previous work and that you are applying them will help build confidence in you from investors. It shows that you and your team know what you’re doing - that you have seen tough situations, worked through hard times, and dusted yourself off and started again.
For more on how to select an investor that is right for your company and how to create a pitch deck that covers all the bases, view our webinar “Preparing to Meet Investors” by Ted Fjallman, CEO of Prokarium and venture partner and Erman Turan, business adviser and investor.
Types of investment
Familiarise yourself with the different types of funding. It will save you time and effort and maximise your outreach campaign - but most importantly, it will ensure you get the right investor. Remember, you are in control of your company - follow your core purpose and values and use this to select the investor type that is best for you. Investors should not choose you! The diagram above is a useful illustrated guide that can help you select the right investment type for your company.
There are investment stages that mirror the milestones your company goes through on its journey to success. In our Global Innovation Partnership Programme, T-DEB, we have represented companies at the Angel/Seed/Series A stage. In our experience, the investment amount is determined by a combination of factors including company stage, company size and investor size and number. Below we summarise the main categories of investment type.
With seed funding you will not have a product that is yet in the market. The product is often in the R&D stage. This money will help the company continue R&D and begin market exploration. A company might go through 2 or 3 rounds of seed funding before a product is launched.
This is usually a sole investor, who will invest in the company and bring the expertise to help it grow. For small start-ups, with little experience, this can be an outstanding way to bring capital and expertise onboard at a key early stage. Angels often have a history of working with businesses.
With Series funding, you will have a product on the market and are looking to expand. The money could be used to produce more or increase marketing and market share. As companies expand further rounds of series funding will be needed - heading towards IPO or buy out.
The valley of death
The ‘valley of death’ is a term used to describe companies in the key phase between product completion and going to market. Some investors steer clear of any company in this period, as it is deemed to be fraught with risk. Some investors specialise in it as the returns on investment can potentially be high. Much has been written on the ‘valley of death’, including in-depth research and tactical planning needed on how to survive the period. Read Steve Blank’s lean startup principles that aim to help bridge the gap between discovery and commercialisation - also part of the valley of death.
When pitching to investors while ‘in the valley of death’, be clear with investors and identify those that are willing to invest without you having revenue. As part of your preparation create a document that outlines the main questions and objections that an investor may have. This will help you have a clear and open conversation that will alleviate any concerns they may have about your company.
With your business strategy and plan (discussed above), show investors how you plan on climbing out of the valley and making your company a success. Show that you have done thorough market research and analysis in terms of targets and figures to hit for you to reach profitability. But above all, be humble and admit when you do not know the answer. If this happens, explain how you might go about finding the answer and draw from previous experience. Ask if they might be willing to offer some advice. You may be surprised at how many people will offer their advice and help out!
Being honest also means holding true to your company's core purpose and values. Show them what you think is the best business model for your company - once you have found the right investor, discussions about your business strategy are part of their commitment: They will be in it for the long haul. This also applies to an investor group who will join your board or an angel investor. They may join the team with ideas on how to speed up the process. Make sure that your research and analysis is very thorough, if it is not, it will come out during due diligence potentially demonstrating that your goals and timeline are unreasonable or not viable.
In conclusion, make sure that you and your team know what you stand for, what you all are working toward, and that you have a plan for how to get there. Carry out a thorough analysis on your company’s cash (demands, targets, cycles, and flow) so that you can seriously explore creative ways of generating it internally. This will ensure that if you do decide to get investment, you know when and where you need it - but also, crucially, what you offer to investors in return.
Stay tuned for our next blog in this series, where we will be looking into how to carry out an investor search and how to reach out to them.