Whichever stage you are at in your start-up journey, it's always wise to be preparing for investment; it’s a great way to focus and plan. Securing investment can give your start-up the boost it needs. Before you go looking for outside funding, it pays to make sure you're fully prepared. Eoin O'Hara is a business developer at Startacus.net. Here are her top questions for investment.

What an ambitious and impressionable start-up founder should avoid at all costs is a premature, poorly considered dash to secure investment. What we don't usually see in the business headlines is the high number of start-ups who fail in their attempts to attract investment. 

There will be many reasons why a start-up is unsuccessful in its endeavour, but they mainly stem from failing to be 'investment ready'.

With so many different forms of investment available, the battle lines are certainly not uniformly drawn. There are, however, a few simple questions you can ask yourself, which are useful in deciding: 'Is my start-up ready for investment?'

1. Can I produce evidence of prior business success?

While an investor is, of course, considering the merits of your idea and its potential for growth, they are also considering you and how 'investable' you are as a person. Many start-up founders are surprised to find how comprehensively their own credentials are probed during the investment-seeking process, discovering too late how unprepared they are to field the inquiries that come their way.

If your start-up represents a first step into the world of business, it is important that you have gleaned solid business acumen from your time so far. Before going after investment, you must be able to demonstrate how you specifically add value to the proposition, calling on past successes as an indicator of your ability to captain the venture into growth and profitability. You should be able to readily call upon specific successes as evidence of a robust potential that will convince would-be investors of your aptitude, skill and abilities.

2. Is my team as good as I would like?

This question addresses another key aspect of your business which will come under heavy scrutiny from potential investors: the talent, worth and ability of your team.  

Your team is your business, and unless you can demonstrate a certain level of competency and, crucially, the ability to grow the business in accordance with your ambitions, your chances of securing investment can be seriously reduced.

In many cases start-ups may not yet have a team in place at the point of seeking investment; this is common and won't put off an investor. They will, however, have the realistic expectation that you are able to put forward a strategy by which you will build the business team, once investment has been offered. It is simply not enough to know the skills and experiences that you want your team to have, you must be able to prove that these are achievable within your location, budget and the time frame that you have.

3. Do I have a robust and discernible advantage over competitors?

This question is as much about being totally in-tune with your industry as it is about knowing your own business. Failure to have a 360-degree awareness of your position in relation to your competitors puts you at risk of coming up short when asked to contextualise your start-up’s unique value.

It is also paramount that you can forecast how dangers to your business will change over time and show that you are prepared to meet each challenge when necessary.

In crowded marketplaces it can take considerable time for a start-up’s advantages over its rivals to become fully apparent. Indeed, the 'unique selling point' of a business is often one of the aspects that is most prone to flexes and alterations during the crucial early days of trading. Can you say with confidence that the advantages you have over your competitors are as robust, developed and fixed as you would like? Consider also whether these advantages add significant value to your clients or customers, and if this results in a marked differentiation between you and your competitors.

4. What are the biggest threats to my business?

Knowing and understanding the threats that your business faces or will face is one of the key indicators of your level of engagement with the business model and demonstrates your appreciation of the difficulties that may lie ahead.  

Remember that being able to identify these threats does not diminish the validity of your start-up. Being aware of your business’s sensitivities is key in developing pragmatic strategies with which to limit their impact. An investor will want their concerns to be allayed, which can only be achieved through keeping a firm handle on the specifics of each threat. 

5. Have I added as much value as possible pre-investment?

Timing is everything when making the pivotal decision of opening up the business you have built to investors. High on your list of priorities must be an assessment of whether you have reached a satisfactory level of value on your own and can negotiate a deal that reflects the work you have put in.  

6. Is now the optimum time to go after investment, or can I reasonably build in further value?

It's an incredibly difficult assessment to make, especially if your start-up is based around an innovation which is 'of the moment'. The danger is that if you seek investment prematurely, you may end up short-changing yourself when it comes to the terms of the funding.  

Consider carefully whether a little extra independent growth could add significant value and use this information in making your decision.

What are the next steps for preparing your business for investment? More about the SEIS and EIS schemes

After you have answered those all important questions, what next steps can you take? The HMRCs Enterprise Investment Scheme and Seed Enterprise Investment Scheme (EIS & SEIS) is one of those buzzwords in finance and many Workspace-based businesses have taken advantage of the process. There's good reason for this: these schemes offer compelling incentives to would-be investors. 

The Enterprise Investment Scheme and Seed Enterprise Investment Scheme are government initiatives, administered by HMRC, aimed at boosting UK business growth. They provide generous tax relief incentives to investors who purchase shares in small, promising, higher-risk, and early-stage companies.

The seed enterprise investment scheme

This scheme helps new and early-stage start-ups raise finance of up to £150,000. There are a number of conditions (read a more detailed overview of the qualifying criteria on the HMRC website). The most relevant criteria are as follows;

The company:

•    Must reside in the UK or at least have a permanent establishment in the UK.
•    Must not be listed on any recognised stock exchange, excluding the Alternative Investment Market. 
•    Must have no more than 24 employees.
•    Must have total assets equalling no more than £200,000. This includes the assets of any subsidiaries, if it happens to be a parent company. 
•    Must not have been in receipt of investment from a Venture Capital Trust (or any other investment initiatives administered by government).
•    Must not have received in excess of £150,000 from Government aid schemes in the past 3 years, since any government aid received within this time period is deducted from the potential investment ceiling.
•    Must have been trading for less than two years from the date on which the shares in question are issued. 

The enterprise investment scheme

This scheme helps small, high-risk companies raise finance of up to £5 million. It is aimed at companies with a high-growth potential who, because of the risks involved in their trade, may struggle to secure the capital necessary to reach maturity. (Again, all the details of the qualifying criteria may be found on the HMRC website.)

The company:

•    Must reside in the UK or at least have a permanent establishment in the UK.
•    Must not be listed on any recognised stock exchange, excluding the Alternative Investment Market. 
•    Must not have control over any other non-qualifying company.
•    Must have no more than 250 full-time employees.
•    Must not have assets totalling more than £15m at the time shares are issued.

How to spend it

Both schemes have placed fairly tight restrictions on the manner in which any funds raised must be spent. Here is a summary of the key details.

Money raised under these schemes:

•    Must be employed within 3 years (2 years in the case of EIS) of the share issue on qualifying trade or for the purpose of preparing for such trade e.g. research and development. 
•    Cannot be used to buy shares or stock in another company.
•    May be used to invest in a qualifying subsidiary.
•    May not be used to pay dividends to shareholders. 

It is important that you are confident in your ability to stay within these parameters, as spending the money in a way that isn't permitted under the scheme will result in your investor losing their tax relief benefits.

Benefits to investors

Investors receive in excess of 50% of their capital investment back in the form of tax breaks and refunds. Beyond this, things become ludicrously complicated. 

The nitty gritty is complicated (leave that particular trial to the accountants) but if your business qualifies for either scheme, investors will see you as a far more appealing investment prospect.  

Where to start

If you are considering these investment schemes to raise capital, make 100% sure that you are eligible. Details of all the requirements can be found in the Issuing Company Manual created by HMRC. The next step would be to seek legal advice.

Workspace customers can take advantage of our community content section dedicated to business finance. Workspace is proud to partner with informed Funding (iF) who frequently offer free conferences, seminars and one-to-one financial consultations for our customers. They work both on and offline to help businesses identify financing issues and raise the funds they need. Read about the customer benefits here.

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