Tips for small businesses seeking investment
Cash flow management and capital raising can and do impact significantly on the ability of a business to survive in the short term and grow over the long term, says Russell Dick, Chief Operations Officer, MICROmega Holdings.
In a recent survey of US small business owners (with 11 to 50 employees each), 50% of the businesses surveyed listed "cash flow" as their top concern, while over 20% reported theirs as "raising capital/funding" (State of Small Business Report).
It's no secret that cash flow management and capital raising are among the most important issues for small businesses, especially in the modern economy. And, while these are obviously very different matters, both can and do impact significantly on the ability of a business to survive in the short term and grow over the long term, says Russell Dick, Chief Operations Officer, MICROmega Holdings.
This article looks at some of the key issues for small businesses to be aware of.
The key concerns
Let's begin with cash flow. For most businesses in the SME category, the single biggest expense lies in salaries and wages. This is a non-negotiable because, in all organisations, staff members are the business. At the same time, ensuring that one is able to meet these plus other cash flow requirements is business-critical.
If we look at capital raising, the fundamental stressor for business owners is trying to convince investors or banks to supply capital or debt. Investors look very carefully at risk, which is why it can be so challenging for smaller businesses to attract them.
The right avenue
I would strongly advise business owners to consider the multitude of traditional avenues that can be taken for investment, not just banks. These include private equity, venture capital funds, stakeholders' networks, and even family and friends.
The right approach
Is there a 'standard way' to approach an investor? For example, should you only ask for funding once you've had five or six interactions with your potential lead investor? Should you only ask if you are at least 50% sure that they'll say yes?
No. I don't believe there is a standard way to engage a potential investor. Every interaction is unique and will have its own nuances; there's no "right time" to ask.
In terms of the pitch itself, most investors will need to understand the business (in detail) and it must come across clearly as both sustainable and scalable. The last thing a potential investor wants is to ask you a question about the business - and these may be wide-ranging - and not receive a satisfactory answer from you.
The right time
If you're at the stage of your business where you feel you have a sustainable and scalable business, you should prepare to get in front of as many potential investors as possible. But you also need to understand where you are in your life cycle - because start-ups have a different risk profile to companies with a track record.
The right risk
Similarly, businesses in different industries will have different risk profiles. And the quantum of funding required will impact the choice of funding partner. When you understand your risk profile relative to the type of returns on offer, you'll be able to determine, and strive to seek out, the most appropriate funding source.
The right priorities
Once that decision's been made, I can't emphasise enough how essential it is that the investor and the organisation's priorities and approaches are aligned at the outset; that they are on the same page. Many things can go wrong between entrepreneurs and financial partners, and the worst outcome is that the investor crushes the entrepreneur's pioneering spirit. In such a scenario, no one wins.
The right questions
It's a good idea to ask potential investors the following shortlist of questions:
1. What is your (detailed) track record as an investor?
2. What is your investment mandate?
3. What are the typical returns that you target?
4. What is your typical risk profile?
5. What are the origins or source of your funding?
The right ingredient
So what's the secret ingredient that makes the all-important relationship work? Well, billionaire entrepreneur Richard Branson says it's not the investor's deep pockets; that these "will [not] sustain the relationship and the business in the long term".
I believe he means that, into the future, the passion and flair of the entrepreneur is what will sustain both the relationship and the business - not the capital of the investor. If the business is well run, it will eventually expand beyond its need for the investor's capital. And as it grows, it will require more and more entrepreneurial skill.
How we do it
As an investment holding company for larger businesses, rather than for start-ups, MICROmega Holdings (MMG) tries to remove as many of the subsidiary's distractions as we can. But the principles remain the same: Provide access to capital and support throughout the business. Provide mentorship and ideas around innovation. Create an environment in which the entrepreneur is able to focus on innovating, and not on administration management. In its experience, businesses become more and more administratively intensive as they grow, which has the effect of bogging entrepreneurs down. It works to ensure that this does not happen.