There are two sides to the business investment equation. Financial institutions and venture capitalists need to offer suitable investment packages and correctly identify suitable funding recipients. But businesses themselves have a responsibility to ensure they are investment ready.
Investment readiness – the ability of a company to successfully attract and secure financing – is often misunderstood.
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Basic compliance – being VAT registered and owning a company bank account – is only the tip of the iceberg. There is typically a lot more that goes into a funding decision.
Since 2015, the number of South African startups managing to secure funding has been growing yearly.
The issue is complicated by the fact that there is not one type of funding. There are multiple financing models out there, each with its own requirements and suitability for a certain type or stage of business. Each business, at each stage of its lifecycle, is going to attract a certain type of investment. These investment types can differ significantly in their requirements.
Start-ups, for example, would not typically be in a position to attract bank funding, which is debt-based and requires a demonstrable track record. Instead, they’ll be seeking early-stage equity investment, which requires thorough due diligence. For an established business to qualify for a simple bridging loan, on the other hand, might only require a review of financial statements and assurance as to the sustainability of the business.
We understand it can be confusing! But the general principle involved in successfully attracting funding is that you need to be able to demonstrate the condition of your business, how that funding will be used, how it will enhance your business’s sustainability or growth, and how you mean to pay back the loan.
This often means going back to basics. You’re going to need to demonstrate to funders the things that will help you grow. Investors need to understand your offering, your market, your company, your relation to competitors, and the trends that are expected to influence these attributes.
For example, your business needs to have a product or service that the market wants. It needs to be identifiable and unique to have a competitive advantage – price competitiveness alone is not a sustainable competitive differentiator.
You need to demonstrate that you understand your market: how big is it? How is it changing? What are its dynamics? What is your addressable market within the broader market? Do you understand consumer behaviour and buying patterns? How are market trends going to affect your business?
You also need to be able to articulate why your company is set up for success. Who is your executive? What is your operating model? And of course, you’ll need to explain your finance function in depth, as well as its suitability to your business model.
Now that you’ve explained the context, you still need to explain how your circumstances are going to adapt if you receive the funding. What is your growth strategy? What is your marketing strategy? You also need to relate strategy to execution to explain how you’re going to deliver on your objectives and reach your goals.
Finally, you’ll need to explain how much money you need, how it’s going to be used, and how you’re going to pay it back. For this you’ll need to provide detailed financial forecasts.
If it sounds like a lot of work, that’s because it is. But that shouldn’t dissuade you from going through the process. Quite the opposite! Wherever you are in your business journey, this process will be deeply beneficial. Even if your funding application is not successful, the planning and appraisal of your business are going to be invaluable in plotting the next phase of growth.
Being ready for funding is part of a business’s natural progression as it becomes larger and more sophisticated. You should be implementing best practices to build and scale your business in any case, and that’s also going to allow you to demonstrate investability.
After all, funders want the same thing as you do: a growing, successful business. You didn’t start your business to attract funding – funding is simply a tool to help you achieve success. So don’t look at becoming investment ready as a chore – instead, use it as an opportunity to build a better business.
Words by Heather Lowe, Head of SME Development at FNB
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