In recent years a number of investment and financial readiness initiatives have been launched to the SME world, these have been designed to raise awareness of what businesses need to do to raise funding. Whilst these have a place in supporting enterprise, many have failed to take into account the time, effort and resource needed to be “really prepared”. Securing money to drive growth whether debt or equity is more than crafting a well-presented business plan and forecasts. Many of the challenges linked to fund raising lie in an organisations fundamental operating systems, management team and business model. A significant number of entrepreneurial SMEs fail to display good housekeeping. This makes them unattractive to potential funders.
My experience is that many entrepreneurs are just not ready to pitch to an investor or bank when the need for funding is identified – often they require a sort of MOT well in advance of their pitch. In many instances structural changes are needed within a SMEs operation – when solid foundations are in place a robust case can be confidently proposed to an investment or relationship manager. This puts key decision makers within financial institutions in a stronger position when they, in turn, make their case to the relevant credit committees.
Entrepreneurs can lose credibility with investors and banks because their business plans cannot withstand scrutiny of a due diligence or credit appraisal process. I believe there needs to be a higher level of awareness and education within the SME community as to what banks and the broader investment community need to see within a financing proposition. SME’s should never forget that the credibility of a financial forecast is built on the effectiveness and robustness of its systems, people, processes and service/product propositions. These latter issues seem to somehow often get overlooked. A failed pitch can close the door on investors or banks for months and in many instances, years.
Broader and closely related issues to fund raising would suggest that many entrepreneurial businesses often:
- Lack absolute clarity of strategy, vision and planning
- Spend too much time in the business and not on it – fail to look at the big picture
- Lack effective management teams, this puts funders on the back foot when it comes to assessing an organisations capability to deliver the plan
- Become slaves to their business and lose sight of the growth plan
- Hallucinate – their vision/strategy is a wish list
- Have financial systems and controls which are not fit for purpose
- Fail to build relationships with their funders and last minute request for funding, often when its too late, is commonplace
Because of the entrepreneur’s lack of awareness of what funders want, financial institutions have come under significant attack for poor lending strategies. Whilst this maybe true in some cases, my experience would indicate that there is no lack of funds for well run businesses, commercially viable ideas and sound new ventures supported by a strong management team. The gap often lies in what the entrepreneurial SME fails to understand about both the process and the quality of their business model. Growth hungry entrepreneurs should spend more time “living in the funders world”.
I was really honored to be asked to present the fast growing business award at last weeks North of England Excellence Dinner. The winner was 3P Logistics and at the end of the ceremonies I made a beeline for the winner, Ian Walker, I wanted to get his view on what it takes to build a high growth company. It was clear the moment Ian started talking he had a passion for his business that was off the scale – it created an instant engagement which meant you had to listen to what he had to say. The guts of his story provided a truly fascinating insight into the motivators for setting up and growing a business. As well as passion, courage and bravery feature high on the list of special qualities – leaving a highly paid job when you have dependants can be an extremely scary moment in life, this is what sorts out the true entrepreneurs from the dreamers. This takes an enourmous amount of guts – fear is what holds so many individuals back from taking the leap.
A few years down the line new dilemmas and challenges are presented to entrepreneurs like Ian. They become most profound at the point when the company is providing a comfortable life style – the internal conversations usually goes something like this, do I take more risk and go for it again and build an even bigger business? However, so few are willing to subject themselves to the burdens and stresses that got them to the well deserved position of a regular salary and the associated benefits that come with being your own boss.
Well my advice for those who decide to continue going for growth is, find a mentor first, someone you trust, then together work out how you are going to do it – the following are what I refer to as “The Essentials” –
- Become future focused and prepare a strategy and game plan which sets the course for the next three years
- Understand the best ways of financing growth, one that balances personal risk, commercial gain and control (or loss of control)
- Effective leadership is core to success. Building a team/organisational structure you can rely on to support the business transition is vital
- Embed disciplined management systems to provide an effective barometer of commercial performance – the bigger you get the tighter the controls need to be
- Ensure you have created a customer focused culture, one that delivers innovative product and service propositions carrying higher margins
- Ensure you have a differentiated business model – one that creates real competitive advantage to support domestic and possibly international growth
- Condition your mindset to win and success.
- Ensure you have the support of your partner and immediate family
Having trusted advisers and being part of a network of likeminded people becomes an important part of the journey it also helps to maintain your sanity.
For the past ten years marketing experts and the finance community have stressed the importance and benefit of having an “elevator pitch”. This is the term, originating from the US, used to describe very clearly and concisely your proposition or offering. The elevator pitch is commonly used in selling situations, increasingly it has become one of the key tools entrepreneurs use to raise finance.
The Dragons Den format has dominated investments forums in recent years and it seems to be these events where the elevator pitch has greatest application. Just how effective is this pitching environment? – on TV we have seen many individuals face humiliation in front of millions. Makes great TV (not for me, as I personally can’t stand the programme). These TV styled events have got boring, local entrepreneurs (business angels, devils more like) with ego’s the size of planets, sit there in judgement of nervous individuals struggling to get their message out in three minutes.
Well in my view anyone who can make a financial judgement based on a three-minute elevator pitch must be a genius. The sensible and ethical investors I have come across avoid TV style pitching formats and spend time trying to understand the idea, the proposition, the person, the market, and the numbers. It’s a considered response based on a least a couple of hours of discussion. How many ideas get lost or fail to see the light of day because an individual can’t get their message over within 30 seconds to 3 minutes. Does that make them a bad entrepreneur?
Two serious and successful VC’s I have spoken to (one in the UK and the other from North America) have started to do away with pitching type events – instead they want to get under the skin of the ideas and the people. How refreshing!
Recent press reports would suggest that our gazelles are finding it harder than other European Countries to raise cash. More than a fifth of companies (many from information and communications technology sectors) failed to get the loan applications approved in recent years. The report which I have yet to find, claims that it provides further evidence of the damaging effects the credit shortage is having on the economy.
Whilst I understand attitudes to funding have changed and the banks have had a severe kicking, I do think we need to look further into the detail. My experience (we have worked with over 3,000 potential high growths!) is that lots of these businesses are just not investment ready and it would be ludicrous to give them cash and indeed subject the founders to PG’s – its for their own good in many instances.
Poorly thought through applications, business models just not viable and inexperienced management teams are also part of the reason for the lack of funds being pushed into the market. Whilst funding is harder to extract, there is cash for well thought through propositions, period. Many of the high growth potential (gazelle types) companies need to be nurtured, mentored and supported – we must look at the quality of the business plans falling onto the desks of VCs and funders, maybe then we would get a better view of the world. My advice to anyone seeking funding is:
1. Can you evidence a viable business model with customers that want to buy what you are offering?
2.Have you got the team in place – thinkers, doers, sellers and controllers
3. Do you have the resources to make it happen and do the financials stack up? More importantly would they stand scrutiny.
4. Can you articulate 1-3 clearly, concisely and convincingly.
If you can’t then dont blame the banks!
We have heard so much about the importance of high growth companies to the economy going forward – 6% of SMEs will deliver in excess of 50% of new jobs over the coming years. Well my question is, are the banks on board to support ambitious individuals with big dreams and good ideas…..yes but…really on board? We hear that the banks are pushing out money to entrepreneurs but at what cost. Well my anecdotal evidence is…the money is available but at great personal exposure to the entrepreneur. The PG requests and unrealistic demands on individuals with dependants still astounds me.
High growth often equates to high risk. If we are going to encourage the next generation of significant employers we must ensure that there is balanced risk on both sides. At the moment what I see is this – the bank will provide the money as long as your house and all other personal assets are put on the line. How many people are willing to do this? My experience is very few.
The ability to stand up and deliver a powerful pitch, proposition or message is a fundamental skill for all growth/ambitious companies. It is a capability woven throughout all aspects of running and managing a business. Selling is such an important skill that many enterprise policy makers have overlooked and only in the US does it get the respect it deserves. The reality is if you can’t sell your business will suffer not only in terms of winning new customers – but it also has a knock on effect to recruiting high quality staff, suppliers and other strategic partners. The ability to raise and secure finance is also a function of how well you can sell. I was talking to a corporate finance friend of mine the other day – she said one VC’s she works with had 1,000 business plans fall on their desk – last year they invested in 7 ! Many of them were sent in on spec and others failed to hit the mark in any way shape or form. I keep hearing that there is no shortage of funds but poorly pitched ideas is common place. Many of them, with tweaks are potentially viable but most end up going nowhere.
I hope that the message and importance of selling and the power of great selling gets on the agenda – so many great ideas fail because of the ineffectiveness of the entrepreneurs ability to stand and deliver!
There has been so much talk about the introduction of Local Enterprise Partnerships (LEPS) and their increasing role in economic development. I have been in numerous consultations over the past few weeks and I am not hearing much about the specific help for SMEs. The discussions and debates have revolved around structures, boards, governance and partnership. Next on the agenda needs to be…. specific propositions and services to help SME’s grow. In particular help needs to focus on:
♣ How do I win more business?
♣ How do I access new markets?
♣ How do I build a clear vision and strategy?
♣ Where do I get funding from and how do I pitch my idea?
♣ What are the best forms of finance for my business?
♣ How do I differentiate my business?
♣ How do I build an effective team?
Fast-growing small and medium enterprises are vital for UK’s future – when are we going to get to the detail of what’s on offer for them? – I don’t think it will be addressed solely by a turbo charged website – anyone who thinks this is ultimate solution is wrong – its just part of the mix!
This may seem such a contradiction to recent blogs that I have written but I can see the point why the financial institutions hang on to their money. A few of my mates are VC’s and in banking – their view is we have money but…..the ideas and pitches we get are bonkers. Why would anyone risk money in poorly thought through ideas and propositions? I suppose this is a fair point. If an idea or business is not viable you can’t really blame investors and the finance community for backing off.
Having said all this, there are some extremely viable businesses that are facing difficult times – the reality is, none of these entrepreneurs are going to get support without personal guarantees or security. Is this fair? Did any of the Directors of the bailed out banks give personal security?…Individuals like Sir (?) Fred Goodwin – have they lost their house?