How to get ready for an external investor

When it comes to growing your business, an external investor can be just the accelerant you need to scale with purpose. It can also be a daunting and time-consuming process, so it’s best to know what to expect and start your capital raising journey on the right foot.    

Getting yourself ready

Capital raising is as much a psychological journey as it is a financial one. Here are three questions to ask yourself: 

What is my vision for the business? It’s important to reflect and look further down the road — are you seeking external investment to maximise your short-term financial outcomes, or are you looking for a long-term partner who can help you take the business to the next level? If it’s the latter, a growth capital investor is a good option to explore. 

What is my future role in the business? Founders need to determine how involved they want to be in the business once capital has been raised. Such as, do you want to remain involved in a day-to-day management capacity, and if so, for how much longer? 

What type of investment partner am I looking for? The answers to the first two questions may impact how much you need to raise, how much equity you’re willing to offer in exchange, and the type of investment partner you should seek. 

For example, if you’re interested in retaining control of your business, you’ll need to understand the impact of dilution and seek growth capital investors who only want to take a minority stake in your business and support you over the long haul. Private equity funds, on the other hand, will generally seek to take control of the business and so may be better suited if you are looking to maximise immediate financial outcomes at the cost of control. 

Four ways growth capital can accelerate your business. Find out more.

Getting your business ready

Once a founder is personally ready to begin the capital raising process, attention shifts to ensuring the business is ready to raise funds. Here are three questions to ask about your business.

Can I articulate my business strategy? This needs to include your goals for the business and how you plan to get there. Your strategy does not have to be a complex document or over-engineered pitch presentation; in fact, it can likely fit on one page. 

Are the financials ready for due diligence? This is where you’ll spend most of your time and energy when raising capital because the numbers go straight to the value of the business – which is exactly what you’ll be negotiating with investors. You’ll generally need to prepare a current balance sheet and profit and loss statements (P&L) for the previous two years, year-to-date, current year forecast and next year forecast. The P&L should be ‘cleansed’ or normalised to exclude any personal expenses but should also include a market rate salary for yourself. 

Are the operations in order? Operational readiness is another core focus, such as ensuring you have properly executed contracts and shareholder agreements, an accurate share register and ownership over your intellectual property, among other tasks. When preparing to raise capital, consider cleaning up your share register (cap table), as this is generally more appealing to later stage investors. 

Raising capital can be a distraction to a founder, so it’s important to have the right support around you. It’s worth considering a corporate advisor who can help map out your raise strategy and provide additional counsel and oversight. 

It’s also worth considering the time it takes to raise capital. While some investors can move quickly – like the Australian Business Growth Fund who can fund in as little as 8 weeks – getting your business investment-ready can take much longer. Typically, it takes between nine to 12 months to start preparing for a raise and cash landing in your bank. So it’s best to start the process before you need the capital.

Read now: What is growth capital and is it right for your business?