As an entrepreneur, you have finally decided to take the plunge to get external financing. But before leaping into the blue yonder, you need some effective strategies in place so that the discussions end with both sides shaking hands. Easier said than done. "Firstly, the plan will depend on the size of your company, the nature of your industry (whether it is a service-oriented business or you are in the manufacturing sector) and whether you have asset backing," said Ihsan Jawad, the founder of Zawya.com and co-founder of Honey Bee Tech Ventures, an investment company, focused on the consumer internet space. "Next you need to decide whether it will be debt or equity. Usually, in most situations, the choice is to go for equity. Else, it is a combination of the two. But debt financing for non-asset based businesses is a little more difficult to achieve and that is why you would consider equity financing. If you have real estate assets or other strong assets that the banks would take as collateral, then debt financing will be possible." For instance, say if you have a small hotel or a real estate company, you can and will look at a bank or trade financing, he said. "But if you are technology or a media company that has very little assets, then you have to get equity financing," said Jawad. Zawya asked the experts to give their top five strategies to sure that an entrepreneur can get external financing to keep the business moving forward.
Create a proper organization structure: "Make sure the company is not heavily dependent on the founders. There should be a second, and, perhaps, even a third line of management," said Binod Shankar, managing director at Genesis Institute, a financial training company that specializes in corporate training. "This way, financiers are assured that if anything happens to the promoters, the company will still survive and their money is safe. So have a proper organization structure, division of responsibilities, clear reporting relationships and so on. Most important? Have good people reporting to you - the founder!"
Detailed strengths and opportunity analysis: "Make sure you have a realistic business plan. Ideally, ensure that this plan shows the potential for growth. Financiers (especially, equity investors) are turned on by the prospects of large geographical or product expansion," said Shankar. "This means that the plan should also talk about strengths and opportunities and how you will build on the strengths and exploit the opportunities." A strategic plan is a statement of your ambition and investors like ambitious people, added Edward Roderick, co-chairman and managing partner at Envestors MENA, a UK-based business angel network with an active regional presence in Dubai. "However, you will have to temper it with a full understanding of your market and its dynamics. You will need to know and understand your competitors and their strategies. If you do not know them, how will you beat them? You have to appreciate the competence and capability of your team and the limitations that this may place on you. Importantly, set realistic short-, medium- and long- term goals," he advised.
Be an investible proposition: "The only one thing that works? You should be a lendable or investable proposition. This is nothing more than the value you generate in your business in relation to your peer group," noted veteran banker Suresh Kumar, chairman at Values Group, a strategic advisory service, which also offers private capital and investment management. "When it comes to equity raising, it is always more difficult than debt or hybrid forms of debt, which is really a proxy for equity. You need to convince the other side that you have good value creation processes and that you will repay the debt as and when it matures. Therefore, you need to have both the ability and the willingness to give confidence to the banks or the external finance providers so that they should have absolutely no doubt on that score."
Have a proper set of accounts in place: A formal management of accounts, cash flow and the balance sheet might be the last thing that many small companies want to shell out cash for, said Roderick. "It is a cost they do not want to face. But these are the first details that you require to present if you want and need to get bank financing or any other form of external financing. From the inception, see that the staff set down a proper process of corporate governance in place within the business," he said. The management team, the company structure, the authority levels of the team, their interaction, the performance of the board - these are the fundamental criteria for people to have confidence in a professional business."
Build a story: "You are selling the prospects of investing into your company - so you need to build up a story for people to get interested enough to invest," said Jawad. "This means that you will need to get all your financials in order and as a constant practice. A significant company will also need a business plan to show where the expenses will be used and what the investor will get in return. Above all, the entrepreneur should also assess and explain the risks of achieving these goals so that the investor will get full confidence if he extends these funds to you."
© Zawya BusinessPulse 2013
