By Mark Summerhayes
If you have a technology business, attracting the investment capital you need to make the most of your opportunities is crucial to your future growth. The question is, who do you turn to and how do you set yourself up for success with potential investors?
The issues that tech businesses face can be different to other types of businesses. For instance, it can take many years for new technology such as a platform, app or SaaS to start generating profits. And that can affect your approach when you consider how to raise investment capital.
In short, taking some time to understand the ins and outs of your business, the tech market and your financing options will help you make a decision that can really pay off in the long run.
Investment capital for tech businesses both big and small
The first step is to think about which type of finance would suit your needs. This depends on things like the size of your tech business, how well established it is, what terms you’re seeking (including the role of investors) and the purpose of seeking funding.
Smaller tech companies may not have much of a track record, which can make it hard to find people who are as passionate about your business as you are. However, even if your business is in the early stages, if it’s generating consistent profit, more doors open. After all, it makes sense that investors want to feel confident in your cashflow. One option is to look at venture capital or growth capital investors, as these firms are experts at helping new businesses get ahead.
“Even if your business is in the early stages, if it’s generating consistent profit, more doors open.”
Another option you might want to consider, especially if you want a smaller amount, is financing your capital expenditure or equipment through an unsecured or secured loan. If you go with this option, make sure you’re aware of all the terms and that paying off your loan on time won’t put too much pressure on your business. A loan is a valid approach when you’re considering how to raise investment capital if you go in with your eyes open.
On the other hand, if your tech business is already well established, it will be easier to approach investors such as private equity firms to raise the investment capital you need. This can have many advantages, including benefitting from valuable expertise, resources and support that can help you take your business to the next level.
Making the right choice for your business
To find the right finance – and the right partner – you need to know what you want to achieve by attracting investment into your tech business. Some common reasons include sourcing capital and expertise to grow your business, de-risking your personal balance sheet, enabling a shareholder to retire, or reshaping your business (for example by buying another company).
You also need to weigh up the role your investors will play and how much input they’ll have into the way you run your business. Will they have some ownership? And how involved – if at all – do you want them to be?
“There’s a big difference between an investor who just hands over the cash without getting involved in management, and one who provides ongoing expertise and support.”
This is a critical part of selecting the right approach to raising investment capital. Think carefully about what sort of partner can add the most value, and who you want to be part of your business’s future.
Winning over potential investors
Once you know why you’re seeking extra funds and how much support you’re looking for, it’s time to prepare to sell your vision to your potential new business partner.
Your pitch should demonstrate a true understanding of your business and the market while getting your audience excited about where you want to take your business from here. Key points should include:
- Your unique value proposition – this is a one-liner that summarises what you offer, why it’s valuable and why it’s better than the rest.
- The technology your business uses or delivers – ensure potential investors are clear on how your products or services work, especially if they’re new or high tech.
- Insights into your customers – this includes what makes your customers tick, how many potential customers there are, and how likely they are to pay for your products or services – whether it’s through a SaaS model with regular licensing fees, ongoing subscription or one-off purchase.
- The benefits you provide your customers – talking in terms of customer benefits rather than product features can be more persuasive, so explain what’s in it for your customers and the ongoing value your technology will deliver to them.
- An awareness of your competition – it’s essential to show you understand the dynamics of your market including your main competitors and how your business is different. This includes the good and the bad – the challenges as well as why other businesses can’t compete with you due to things like patents to protect your technology or intellectual property.
- Your competitive advantage – remember that your aim is to convince your audience why they should support you rather than all the other companies they could be investing in.
Ensuring the numbers add up
Passion for your business goes a long way. When you’re considering how to raise investment capital, however, much of your appeal comes down to your bottom line.
To reassure investors that your tech business is not only profitable, but that you’re on top of all the financials, you need to present details of your current trading position, assets and liabilities. Regardless of the business opportunity you’re offering them, potential investors want to know that your operation is well-run and your financials are up to date and transparent.
Investors will expect to see your profit and loss statements for at least three years, as well as spreadsheets showing your EBITDA, customers and churn rates.
Make sure you’re ready to talk through any assumptions you’ve made in calculating your sales goals as well as what your key expense drivers are. And try not to let your passion get in the way of being realistic. Investors are used to entrepreneurs who make unrealistic projections, and this could work against you rather than for you.
“While financial reporting presents a good picture of past performance, potential partners will be more interested in what your business could achieve from here.”
Keep in mind that while financial reporting presents a good picture of past performance, potential investment partners will be more interested in what your business could achieve from here. Using your financials to present a sales forecast can help you paint the most positive picture of the future.
The team at Pemba Capital have proven expertise in partnering with businesses across a range of sectors including technology, healthcare, business services, financial services and education. To discover how we can help you raise investment capital for your business, talk to us today.