For many a small business or new start-up, attracting external investment from a business angel or group of investors marks a crucial stage in their development. With extra funding, ambitions can become concrete realities and a small-scale operation can really start thinking big.
But what steps should entrepreneurs be taking to catching the eye of investor? Jamie Andrew, chairman of Melrose-based angel investment group TRI Capital, is well qualified to answer that. Since its formation in 2004, the organisation has invested some £11.5 million in mainly Scottish businesses, and been involved in co-investments with partners amounting to £65 million.
Before it attempts to woo investors for funding, a small firm needs to take a good look at itself, he advises. “The business needs a clear vision of how that business addresses a market need,” says Andrew. “They need a clear and concise vision as to why their business might be an attractive opportunity for investors. They need a clear vision of what they want the investment for. And they should be able to articulate all that in a two-minute elevator-type pitch.”
It’s also important to be realistic, he says. “They need a very credible business plan. No overly ambitious projections… where in year three we all become multimillionaires. That’s just not feasible,” explains Andrew. “There should be evidence-based marketing and sales plans and a clear demonstration of the market need. You need a robust financial forecast, [outlining] cash-flow needs.”
Looking at it from the other side of the fence, Kenny Picken, managing director of travel bookings-system provider Traveltek, agrees. The East Kilbride-based firm recently announced plans to more than double its workforce to around 200 people over the next three years after it secured more than £5 million of investment.
“If you have a little trading history, you really must do some housecleaning,” he says. “Many small businesses start off in unconventional ways and it’s more than likely that any investment decision will be made by people from an accountancy background so no matter what your business is or how good your idea is, your investor will want to see a well-managed business along traditional lines.”
To help get your house in order, call the professionals, advises Picken. “You will need to find a professional firm of advisors and that’s rarely going to be your current accountants, especially if you’re a small firm or start-up.”
Having a strong team behind you is key, he adds. “Rarely will investors back a one-horse race and therefore, to scale your business for growth, you need to find great people and nurture your own people from within. The key issue for any entrepreneur is finding employees that will treat their business in the same way.” Incentives such as share options or profit share will, says Picken, “allow your top people to share your motivation without facing the risk you’ve taken”.
Another key factor in a firm’s ability to attract investment is, says Andrew, its reputation.“There are various facets to reputation,” he explains. “So if you’re an honest person and you’ve got integrity, that’s a tick in the box. If you’ve got a reputation of being able to deliver and add value, that’s a tick in the box. If you’ve got a reputation of being good to work with and willing to learn that’s a tick in the box.”
Spreading the word about your reputation is also important, of course, but it’s also important to remain focused when networking, advises Andrew. “There’s no point in just going into a room and just chatting generally to people – you walk out and say: ‘Yeah, that was a nice evening’.” Instead, he suggests focusing on who you need to speak to and why – even securing a delegate list ahead of an event and contacting them, if appropriate, to arrange a meeting. “You need a focus. You need to know exactly why you’re networking,” he says.
Again, Picken concurs. “Choose where you spend your time and your money very carefully,” he warns. “It’s truly a fine line between networking and partying for a living. Both may appear to be the same but the respect you will earn is very different so never cross the line between ‘networking’ and ‘partying’. The former will pay dividends, the latter may kill your business reputation.”
Choosing the right events to attend and network at might seem tricky, but given that the likes of Andrew and Picken have previously appeared at Young Company Finance (YCF) Scotland’s annual conference, this year’s event seems like a sensible date for the diary for any small Scottish business. This year’s conference, which takes place on September 15 at Edinburgh’s Sheraton Grand Hotel, will focus on the theme of trade sales, while also offering the opportunity to network with and learn from investors, analysts and entrepreneurs who have done it all before.