How to get investors interested in your start-up

Securing investment can be crucial to growing your business.

In this article, Stuart Price, partner in our Commercial law team at Lodders, outlines the key essentials and points to consider when seeking investment for your start-up business.

The essentials for attracting an investor:

Have a standout unique selling proposition (USP)

If your business offers a product or service with a unique selling proposition, it can attract investors. Be aware that investors are rarely interested in businesses that simply mimic others unless they can prove that what they are doing is better than the competition.

Sell that USP

You and your team must be able to explain your USP in a way that gets everyone excited about it.

Build a strong team

Having a team that includes well-respected experts can attract investors. By the time business are serious about attracting investment, they have already appointed one or more Non-Executive Directors (NEDs) to help them with key aspects of their business journey. NEDs bring experience, contacts and credibility in addition to their skill base.

Demonstrate admirable corporate social responsibility

Showing that your business is socially responsible can also attract investors. It will also help you to pitch for new business, particularly with larger corporate and third sector businesses for whom CSR may be a statutory or regulatory requirement.

Get an independent and realistic valuation

Business owners are not really in a position to place a realistic valuation on their business and its prospects. A report written by a third party (e.g. an accountant) who has experience in valuing start-up and fast-growth businesses in your sector, will be able to create something credible and not merely optimistic.

Offer an attractive stake in your business

Investors put time, money, and effort into a business because they want to see a good return on that investment. But don’t be that business you see so often in the BBC television programme “Dragons Den” where a pitch is made for £100,000 for 1% of the business (thereby valuing the company, often without tangible assets,  few customers and little if any revenue, at £10 million) which is rarely attractive to anyone.

When a business is seeking external investors, there are several legal issues to consider:

Due diligence

External investors require a high degree of due diligence and detailed business plans, including profit-and-loss accounts, work-in-progress forecasts, revenue expectations, customer base, and market analysis.

Ownership of ideas

Most businesses these days do not have fixed plant and machinery. The UK has a strong service economy which is driven by ideas. To have any value to an investor, those ideas have to be original, identified, protected, exploited and in some cases capable of being defended. Many potential investments fail due to founders failing to appreciate the importance of intellectual property.

Shareholder agreements

It’s crucial to have a well-structured shareholder contract that defines the relationships between the founders and investors and anticipates potential future events such as a founder exiting the company.

Veto rights

Investors often require veto rights in respect of the operation and administration of the business. These may include alteration of the share capital (thereby preventing any further fund-raising without their consent) or limits on spending or borrowing.

Cultural integration

If the business is planning to acquire other firms using the investment, it’s important to consider how cultural integration will be managed.

Company valuation and share distribution

The number of shares investors receive in exchange for their investment should be clearly established from the beginning. A well-planned share structure, including realistic growth predictions and underlying assumptions, along with defined exit strategies, will enhance the likelihood of a successful negotiation.

More from the entrepreneur handbook

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More information

For more information regarding the set-up of your business, contact Stuart Price, partner. E: stuart.price@lodders.co.uk, T: 01789 339117