The number one question we get asked by founder teams is, "How do we raise funding or investment for our company?"
Every successful business reaches a stage where it has to choose its growth path. Either grow organically, using operational capital as and when it’s available, or raise growth capital in order to scale up faster.
Any company that is considering fundraising needs a number of items in place in order to be funding ready. The OCFO team has worked with hundreds of companies who are scaling up and they have seven key steps that can be used to hack the fundraising process.
1. Build a great business.
The best way to entice investors is to build a company that is an attractive investment. Let’s look at three key steps that can help achieve this.
- Have a great business value proposition
What value are you offering potential clients? The million dollar question is “How can I offer supplies, goods and services that people want, to as many people as possible at an affordable price?” Examine your business value proposition and offering, before you even consider scaling up.
- A strong team leading your business
Your staff and leadership team are both important aspects of growing your business. Your leadership team should be the driving force behind your growth, so get strong, visionary individuals into this position.
- Good cash flow management
It doesn’t matter how much profit you make, if the business is struggling with cash flow. Lack of positive cash flow will hamper growth, so this should be a top priority.
2. Ensure a clear expansion strategy
Many entrepreneurs want to raise finance, but do not have the necessary long-term vision to implement expansion. Ensure that your CEO has the time and perspective to take an overview of your business by shifting smaller, low-level tasks away from them. This allows the CEO to focus on the vision, growth and expansion strategy of the business, which is always attractive to investors.
3. Financial modeling.
Any company needs to have a good financial model in place over three, five or ten years, depending on what is applicable. This should reflect revenue, expenses and operating capital structure, so that an investor can see how that strategy is translated into profit. Let’s break this down:
- Plan your financial model
Plan before implementing – this will save time over the long term. Examine whether you are focusing on your present or future business, and what a potential investor might value.
- What type of technology are you using
Decide what software gives you the best outcome based on your company’s needs. Consider whether you need remote or cloud access and who you will be collaborating with.
- Reality will differ from the forecast model
Ensure your model is smart and adaptable. There will be a number of unknown variables and flexibility allows you to adapt and change.
- Consider boarding financial models
Target your offering to potential investors. If they use a specific template, incorporate that into your model, and get everything right from the outset.
4. Understand your company’s value
Value is a subjective matter – founders and investors see things differently. It is important to ask what the person on the other side of the table is interested in. Of what value is your business to them? A foreign investor that wants to get a footprint into Africa, will value your company differently than local markets would. Keep in mind that company valuations are not solely a financial exercise, they’re also a sales and marketing exercise.
5. Nail your due diligence.
Make sure that you have your document bank ready. Sometimes a good DD pack can influence and improve the valuation of your business by up to 20%. Good documentation should reflect what your management team has done over time, as well as your potential for growth.
6. Always make sure that legal and HR is in place.
Contracts and policies are some of the big items that get neglected when building a rapidly scaling company.
- A good culture fit for recruitment is of vital importance. At Outsourced CFO, we place great emphasis on recruiting young and dynamic individuals who are eager for continuous learning. If this is not your area of expertise, get expert advice from a specialist. It’s expensive to replace staff, so invest in your staff process right from the outset.
- As for legal matters, do your research and understand your industry. There might be specific legal requirements applicable to your sector, so make sure that you understand them and your company’s position. There are also internal legal processes, such as memorandums of incorporation or defining the directors’ responsibilities, that need to be put in place. This will not only give potential investors peace of mind but will allow your business to function at its best.
7. The last step is to get real.
Many problems arise because business owners are busy running their business, and cannot step back to take a more generalized view. That can cause problems with compliance, such as registering for VAT. You might need to call in some outside help, like a virtual CFO to help you assess your growing business.
Over the next few months, we will be sharing more detailed content on all of the steps discussed here. Our CFO team is currently working on over a dozen fundraising processes with our clients, so there are sure to be many useful nuggets that you can draw from in your own fundraising. Keep following the OCFO conversation on our new website, subscribe to our YouTube channel, and follow us on social media. Happy fundraising!