This is the first of a series of 6 articles aimed at Owner Managed Businesses addressing various issues that they face through the complete business cycle from Start-Up, through expansion to final exit. By Frank Coombes, Coombes Corporate Finance
The climate for new start ups and company expansion has been very healthy over the last few years. In respect to Start-Ups, Venture Capitalists (VCs) invested €28m in 48 start-ups in 2004 versus €33m in 106 start-ups in 2003. Equity is also being invested into companies expanding with VCs investing €33m in 42 expansions/other type companies in 2004. The consensus is that this will continue, with a recent survey carried out by IBI indicated that almost 30% of privately owned businesses expect to see some acquisition activity in the next 3 years.
These projects require equity investments. However according to a recent survey by the Irish venture capital Association (IVCA), only 25% of the respondents expect to invest in new projects in 2006 compared to 80% last year. So what are the key weapons that will put you ahead of the pack in the battle for new Equity? The private company needs the following:
- Strong team.
- Clearly defined product or service
- Strong marketing strategy with a clear route to market.
- Robust Business Plan
1. A Strong Team
An investor’s evaluation will mainly be based on the strength of the company’s team. This is borne out by an IVCA survey with its members, where it stated that the biggest reason why their members turn away an application for funding is the lack of an experienced management team.
This team should include:
- An experienced and enthusiastic leader at CEO
- A balanced Board of Directors including Non Executive Directors
- A committed management team and workforce
- Experienced Advisors
The CEO needs to show that he/she has got the vision for the company, clear direction on how to deliver this vision, and a high degree of energy to motivate all those around him/her to achieve the company’s goals.
The CEO should be supported at a strategic level by a well-balanced board and at an operational level by a dedicated workforce. The Board should comprise of executive and non-executive directors. The correct selection of the non-executive directors can add great experience and credibility to the business. Hence ideally the company should select people that are well respected within the business community.
As any start up or early stage company would tell you, the success of the business is very much dependant on its employees. It is important for any start up company to minimise the turnover of key staff so as to maximise the ‘knowledge’ retention within the company. Therefore, it is important to put in place such incentives as Share option scheme(s) and/or a profit sharing scheme so as to maximise staff retention. Investors will look very favorably at such initiatives.
It is also important to employ experienced advisors, particularly in the field of Corporate Finance. Too often the time and energy of the CEO and other key management is sucked into in the process of raising finance and away from their key operational and development responsibilities to the business. Therefore, it is important to employ advisers to reduce the burden on key management during the financing process. Well-established Advisors will also add value to the company through their contacts and experience.
2. A clearly defined product
The Investor will look for a clearly defined product, that is market driven and one that is valued by its potential customers. It is a common mistake when developing a product that it is driven by technical abilities rather than being a product or service that the market requires. Hence, in these situations when the product is developed it transpires that the market is very limited, non-viable or at worst does not exist at all.
In defining the product, the Company should identify the unique selling point (USP) of its product, i.e. what will differentiate it from any competing products. Ideally from an Investors point of view a new product should have a defined market and where possible have intellectual property rights attached.
3. A strong marketing strategy with a clear route to market
The company should have a strong marketing plan that will form the blueprint for marketing and distributing the company’s products. In many investors’ eyes, a clear route to market is second only in importance to their assessment of the strength of the management team. Too often a company is very enthusiastic about a product but does not consider how to target the specific market. Channel management is key to the company’s strategy, as the investor will evaluate how quickly and efficiently the company can sell its product to its customers in an ever-changing market environment.
Ideally, the target market should be one that has great growth potential. Most Investors will prefer a market with growth potential in favor of a product that endeavors to capture market share from existing suppliers.
4. A Robust Business Plan
The importance of a good Business Plan cannot be under estimated. The Business Plan will be the key selling tool for your company in the process of raising finance and often it is the first view a potential investor will get of your company.
A good Business Plan needs to be informative, clear and to the point. The plan should focus on the unique selling points of the company and highlight the key ingredients looked for by investors, namely a strong management team and a well-established marketing strategy. Every business plan should be supported by a robust financial model, which highlights the business drivers and the potential return to the investor.
The competition between companies for investment funds in the present environment is fierce due to the high supply of quality investment opportunities. Hence the company that gathers together the key weaponry is well prepared for the battles of raising finance. Just remember that winning or losing any one battle does not necessary mean the end of the war!
Frank Coombes – Coombes Corporate Finance 021 4943944