When is the right time for a growing business to seek investment?

When is the right time for a growing to seek investment?

So, you’re part of a relatively new business that is trading successfully. Your company is establishing itself in its industry but aside from the tons of market research you undertook, you can’t exactly predict the stage stage of growth. 

You may need a financial injection, you may need investment. 

However, getting an investor not only interested but ready to fund your business’ growth can sometimes be easier said than done. It’s all about timing, which is what we’re going to outline here. Take a look.

Mastering the art of valuing a growing business

When it comes to early-stage funding and fast growth businesses, the first thing you need to do is understand what your business is worth. How will you know whether you’re getting a good offer or not? Knowing your business’ worth will give you a firm grounding in any future negotiations.

Of course, valuing a fast growth businesses can be notoriously tricky. How do you value something where it is difficult to estimate future growth potential? For as difficult as it may be, valuation is a crucial stage of every growing businesses life. Here are a few tips to get you started (these apply for both the investor and the growing company).

Start with cash flow analysis

Cash flow analysis is an integral step in a company’s valuation and while there are different ways of analysing cash flow, the underlying principles remain the same. A company’s current valuation is based upon many different aspects, which could factor in the money it is expected to make later on down the line. When you’re looking for investors, you may phrase this money another way: it is the value of money which shareholders can be expected to receive later on down the line. 

Admittedly, being a relatively new business makes cash flow analysis a little harder because things may be precarious (which is precisely why you need an investor). However precarious your business’ finances might be, try to get as clear an idea of your future cash flow as you can.

Take stock of your current assets

Of course, as a relatively new business experiencing growth, your assets may be limited. What assets you do have, however, will contribute to wanting to invest in your company. Tangible assets include land, buildings, and machinery, whereas intangible assets include things like brand recognition and intellectual property.

Comparable valuation

Comparable valuation is a simple method where you consider the value of comparable companies (they’re likely in the same industry and are a year or two ahead of you) and, in a roundabout way, apply that growth to you.

It’s not an exact science, but it’ll at least give you peace of mind if you know that there’s a demand for your service. All that’s left to do is deliver that service better than your competitors.

advice for startups

Stages of company development and valuation

Take a look at the table below. It gives you a clear framework for business growth so that you can see exactly where your business is. This allows you to be realistic about how much to ask for when talking to investors.

Estimated company value      Stage of development
£250,000 – £500,000Has an exciting business idea or business plan
£500,000 – £1 millionHas a strong management team in place to carry out the plan
£1 million – £2 millionHas a final product or prototype
£2 million – £5 millionHas strategic alliances or partners, or signs of an established ‘customer base’
£5 million+Has clear signs of revenue growth and obvious pathways to profitability

 

Source: https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

What motivates an investor? 

To know the right time in which to seek investment, you need a better understanding of the investors you’re going to target. You need to know your audience so that you can ensure what interests them and what does not. You should time your approach well, because in terms of profit an investor will want to come on-board when things are just heating up (for example, if you’re having a strong few months then it may be a good idea to seek the cash injection that will help prolong those strong few months).

With all that in mind, here are a few things that your potential investor may be looking for.

Is the business appealing to the investor?

It all starts here. This may come as a surprise, but most investors need an initial spark to get interested. You need to get their attention and show them why your growth plans are worthy of their time and investment. This is the starting point of most investments, before talk of profit margins or growth plans. There needs to be something to spark an investor’s interest. For example, you could work in an industry that the investor has always wanted to get into, or they’re genuinely interested in your product/service.

What will the financial returns be like?

Of course, investors are interested in profit potential, too. You’ll need to give them detailed proof of your historical earnings, as well as current earnings and future forecasted earnings. While most investors are willing to take on a certain degree of risk, they’ll want some kind of reassurance that your business is worthy of their time and their money.

A management team they can believe in

Whether or not the investor will be actively involved in your business, they’ll want a management team they can believe in. That means reliability, knowledge, skill, and respect. It helps if you’re on friendly terms, too. If you’re putting your business on the line in the hope of investment, you’ll need to be on top of things and bring your A-game.

When is the right time for a startup to seek investment?

Now that you have all the information at your disposal, all you have to think about is timing. Honestly, there is no black-and-white answer to this. We suggest that your businesses growth plans fulfils two conditions. If these two conditions are met, then it may be time to start talking to investors.

  1. You have established a solid, repeatable formula for retaining customers. These are real sales, made not by friends or family, but real customers. This is called customer traction, and once it’s guaranteed, you can seek the funds needed to scale up.
  2. You understand that continuing to grow your business without external funding is risky. Other businesses, with more money and legal backing, could imitate you. This could spell the end – if this applies to you, it’s time to bolster your business and its resources with an investment.

Remember, we have an experienced team of business growth accountants who can advise you on scaling up your business. When it comes to seeking investment for your business, you need the backing of growth accountants. To get in touch, fill in our quick enquiry form (you can also call us on 0161 832 4841).