Securing equity investment

When you're raising equity to fund your business, you will need to go through different steps in the process. This guide explains the different stages and what you need to do in each step.

Getting started

How do you approach and build a relationship with an investor? Watch our video with finance expert, Laurence Jamieson, as he talks through the best options - depending on the size, and type, of your company.

If you've just started your business, business incubators could give you some support before applying for funding. Business incubators can help you in areas such as access to bank loans, loan funds and angel investors.

Deciding on what type of investor you want and/or need

There are different kinds of equity investors. Different investor types will be suited to different businesses. Whether they will be interested in funding your business depends on:

  • Your sector
  • The stage of your business
  • Your business location
  • Your financial position

There's no point ruling out any investors who might be prepared to invest in your business. But at the same time you want to quickly rule out those who won’t be interested in your business.

For example, if you’re a very early-stage business with little to no revenue, it is probably not worth approaching large private equity houses.

Know how much money you need before thinking about what type of investor would suit your business.

Certain investors may not be able to give you all the money you need; you may need a syndicate, or approach larger investors.

The amount of money you need can also have a material impact on the valuation of your business

Be prepared

Preparing your business for investment

You need to prepare your business to attract equity investors. This includes preparing a robust business plan, having a board of directors in place and brushing up on your presentation skills.

Getting ready to pitch to investors

Having a good investment pitch is critical. The way you present your pitch will be different depending on the investment you’re looking for.

For example, angel investors may be happy to have a technical but more informal pitch while established venture capital firms will want a more formal pitch with a proposal to scrutinise.

Crowdfunding platforms may want the same information, but as a simplified version.

Ask our financial readiness specialists for tailored guidance on how to pitch to investors

Getting a valuation for your business

Be prepared to negotiate to secure your equity investment - so you'll need to come to these negotiations with a clear idea of what you think your business is worth.

And be ready to back up your reasons behind your figure because your potential investors will want to talk you down to a lower valuation.

Bear in mind that you need to value your business, based not only on its current state, but thinking about its future state as well. For this reason, the amount of money you need will affect your valuation.

Approaching investors

Approaching investors can be a challenging and time-consuming process. Remember that investors are approached by thousands of companies every year. Therefore, think about how you are going to approach an investor to achieve the most impact.

There are several ways to approach investors. Apart from phoning or emailing, investor events are also a great way to meet investors. You can also be referred by a contact you have or an intermediary.

Be prepared to approach a lot of investors and accept that you will get 'no' from some investors. However, it's a good idea to use these opportunities to gain feedback and alter your pitch and business plan to improve your chances for your next investor meeting.

Agree terms with your investor

Once you’ve found an investor and you’ve agreed on a valuation (or at least a ballpark figure), the investor will usually present you with a term sheet.

The term sheet outlines the terms of their investment. Different investors will use different term sheets, of differing levels of formality.

The term sheet will likely cover the proposed funding and related terms, the board structure of the company, and what happens in the event of liquidation.

Check these terms with your lawyers and be completely happy with them before accepting them.

Preparing due diligence and legal process

Any potential investor will want to carry out due diligence. In your investment proposition you will have detailed revenue projections based on your current financial status and expected future performance. Your investor will need to verify these figures.

As you go through the process of raising equity, you may need to revisit one or more of these stages. Raising equity investment is as much of an art as a science.

If you’re unsure whether equity finance is the right option for your business, it's a good idea to read the following guides:

Finance options for your business: Debt versus equity

Raising equity finance

Got a question about accessing finance?

Get in touch with our team of experienced financial readiness experts who can help you secure funding from a range of sources including bank funding, equity funding, and grants.

Disclaimer

This guide was written by our investment team at the Scottish Investment Bank who work with Scottish businesses and UK and international investors.