Securing the right funding at the right time can make all the difference in ensuring growing technology businesses are able to scale up. But how do these businesses give themselves the best chance of finding the funding they need?
Before the search for funding begins, it is vital that business owners understand what kind of finance they are looking for. The funding options open to a technology business will depend on tits current stage of maturity.
Very early-stage ventures, yet to earn any revenues or prove their business may need to gain support from family, friends and angel investors. There is also a growing number of technology-focused accelerator and incubator programmes offering start-ups access to a broad range of help, including finance.
Young businesses which are generating revenue can seek investment from venture capital or growth capital investors, familiar with the early stage challenges businesses face. Alternatively, they might like to investigate debt funding, especially if only raising a small amount. Confidence of the cashflow generation of a business is crucial and business owners need to be prepared for the restrictions that debt financing brings.
Established businesses will have more success in attracting capital from investors such as private equity firms, who can bring with them a range of expertise and functional capabilities to support growth.
Preparation is key
Business owners must identify the fundamentals of what they hope to achieve from the funding process in order to find the best partner for their needs. Are they looking to quickly sell the business? Or are they looking for financial support with the intention of continuing to lead the business through its next stage of growth? Perhaps they’re also hoping to take some cash from the process, thereby reducing their exposure to risk.
Consideration should also be given as to how much support the management team are looking for. Many business owners value the crucial advice and assistance which a hands-on investor can provide, while others are looking solely for financial support, and don’t want any interference in the management of their business. It is vital that business owners understand and set out their views upfront if they are to identify whether a particular investor is the best partner to support their ambition.
Having determined the purpose of the investment and the level of support required, business owners will then have to prepare for the all-important pitch meeting. Preparation for this should address some key considerations, the first of which is to prove that the business knows its customers.
Business owners should be able to articulate their company’s competitive advantage in a couple of sentences, quickly making the case for why an investor should support them over any of the many other companies vying for their attention. They should define the technology their business offers, and the economic benefit it delivers for customers. If the proposition is based on an as-a-service model, for example, why would customers be prepared to pay regular licensing fees? Or, if it’s a one-off solution, why would customers be prepared to incur the upfront cost? It’s necessary to illustrate the value the business will deliver for customers, and demonstrate how this value will scale as the business grows.
An awareness of the market is crucial too. Business owners should understand the dynamics of their competitive environment, know their main competitors and be able to explain how they differentiate. Investors will also want to establish the barriers to entry, such as having patents in place to protect the technology or having clear ownership of the business’s intellectual property.
Business owners should also be able to explain the number of potential customers in a market, and also their willingness to pay, e.g. whether customers would pay one-off fees for the technology or subscribe on an ongoing basis.
Demonstrating this market awareness is key to proving that there is no demand constraint on the business; rather, the constraint is on the supply side, hence the need for investment.
Make sure financials are in order
For potential investors to quickly understand the value of a business, its finances must be transparent, offering a clear picture of its current trading position, assets and liabilities. Business owners must show that a business is well-run operationally and financially, as well as offering a compelling value proposition.
Financial reports should be used to explain where growth is coming from and where the less profitable areas are currently, and investors should be talked through the key performance metrics. For technology businesses in particular, this will require up-to-date information on the most relevant metrics, such as lifetime value data, churn rates, evidence of ROI, and data on recurring revenues.
Investors will also want to see traditional performance yardsticks such as revenue growth, profitability and EBITDA. However, while financial reporting provides a snapshot of what’s gone before, investors will be more focused on what will happen in the future. It’s important, therefore, to be able to use the financials to look forward.
Download Livingbridge’s full report on finding funding for your TMT business here.
Paul Landsman, Investment Director, Livingbridge
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