How to make your business investible in a post-COVID economy

We spoke with Shaun Beaney, from ICAEW’s Corporate Finance Faculty, about what investors are really looking for in a business, and how borrowers can make their search for funding more effective as they look to the future.

Tell us about your role at ICAEW

I work in the Corporate Finance Faculty at ICAEW, in particular on communications, public policy and our practical initiatives. My particular areas of expertise include innovation investment, access to capital, high-growth companies and venture capital. My passions really are early-stage businesses – which gets me into looking at areas of emerging technologies such as artificial intelligence (AI) and immersive – and working with the creative industries.

Finding investment for businesses is difficult right now. Which forms of investment are still available in the current climate?

It depends on both the type of funding a business is taking and the kind of investor they are approaching. But generally, most types of investment are still available, even if it’s tougher to raise money now. Businesses need to demonstrate that their plans are robust and that they’ve taken into account big changes in the economy that the crisis has brought about.

For example, a business could seek the following types of investment:

Venture capital: VCs typically look for global markets that could be worth hundreds of millions of pounds/dollars. In the current climate, therefore, they will be reviewing the addressable market and looking in particular at those technologies and businesses that are in a strong position to thrive post-COVID-19.

Angel investment: Angels are more inclined to invest in new tech start-ups at an earlier stage than VCs. But the risks are higher for them, so they aim to take big equity stakes in the ventures they back. The anticipation is that, by the time a new venture that’s now being developed is ready to go to market, the global context of the pandemic will be very different.

Crowdfunding: Even during times of uncertainty, investors can band together to support businesses, contributing money in smaller amounts and spreading the potential risks. 

How has COVID-19 changed investors’ attitude to risk?

I don’t believe the COVID-19 crisis has changed the principles of how investors make decisions – level of experience, research, due diligence, understanding of the market, for example. Many investors are specialists in particular sectors so will be looking for a business that’s offering something unique.

Right now, it’s much more difficult for companies to predict what will happen next and make robust forecasts. There’s still so much that’s uncertain and so many things hitting business demand very hard. Investors and lenders are of course much more cautious about backing businesses that are facing difficulties the pandemic has created.

In some cases, investors are choosing to put their money into businesses that they’ve invested in previously, where they know it can be deployed and make a return. Because of this, it may be harder for new businesses to reach these investors, so they need to ensure their investment pitches are as appealing as possible.

Are investors still investing right now? Would it be better to wait?

The good news is that there is still a reasonable amount of equity investment going on in Britain. Data from Beauhurst suggested that by the end of the second quarter of 2020, seed and venture capital deals in the UK had raised around £1.2 billion.

This was down on the figure for the same period in previous years (around £1.4 billion), but it was still a significant amount of money. Some of that of course was overhanging from investment commitments before the crisis, but the majority is new investment linked to recovery and to potential future growth. The number of deals has dropped sharply, to about 800 in that quarter from more than 1,400 in the second quarter of 2019. I think the third quarter might be even tougher, but there will still be a fair amount of activity.

Areas of particular interest to some investors are those that can actively support COVID-19 recovery, such as healthcare applications, remote working, connectivity. To other investors, deep technologies are always interesting – AI, Internet of Things (IoT), quantum computing and cybersecurity – as are life sciences.

How should businesses go about finding a suitable investor?

I’d recommend they start by visiting the Business Finance Guide. It’s an independent guide, and that’s what it’s there for.

Then they should look into which type of investment would be more beneficial – equity investment or debt-based funding. Following that, they can begin to explore specialist advice and funding routes from the other partners, and find the right investor.

What’s the best way to approach investors?

The reality is that some investors typically will still have money to invest. But they’ve always been rigorous in understanding how businesses will use their money to support plans for growth. This hasn’t changed. So, the key is to make your pitch stand out, but without overcomplicating what you’re asking for.

What has changed, however, is that while pre-profit businesses are unlikely to have required much in the way of government funding, some previously profitable/later-stage businesses have been hit much harder, and have taken on debt. In this scenario, they will have to work hard to convince new investors that their plans will lead (with some degree of certainty) to recovery.

The way to approach these investors will depend on both the type of investor and the type of funding you’re looking for. At one end of the spectrum, if you were trying to approach a top venture capitalist, you may not even be able to get a meeting with them without a personal introduction. If you are able to get a meeting, it’s vital that you research the investor and focus on meeting their specific requirements.

At the other end of the spectrum, crowdfunding requires a different approach. Although there’s a standard method to some parts of the process, what’s most important is to make the pitch as widely creative and appealing as you can, as you’re aiming to reach as many potential investors as possible and to stand out from other crowdfunding campaigns. You can do this in various ways, whether it’s making a video or putting together an investor pack, perhaps with the support of a creative or marketing partner who can bring it to life. The key is to make your pitch stand out, but without overcomplicating it.

What does a good pitch deck look like?

There’s often confusion about pitch decks and business plans and what goes in each. Business plans are conservative in their structure. People are processing large amounts of information so having a standard structure makes it easier to go through. Pitch decks on the other hand provide businesses with the opportunity to be more creative in their approach. The three most important things to get across in a pitch deck are that:

1. You have a good, realistic grasp of your product or service.
2. You understand your potential clients and/or customers – if you don’t, you won’t be doing business with anyone.
3. There is a real market for your product or service, and can back this up with empirical evidence.

You really can’t do too much research to support your case and prepare on how to pitch the business.

What pitfalls should a business avoid when preparing a pitch for investors?

There are two main pitfalls I see businesses make time and time again:

1. Not demonstrating there is a real market for your product. I meet businesses that are offering something people would be very interested in, but they can’t show that there will be enough custom to pay for it and make their businesses profitable.
2. Not working out real margins. It’s important to understand where the real costs are and how your pricing reflects that. In business in general, if you don’t get your margins right, your company won’t be viable. You need to constantly test those margins, whether that’s through formal research or conversations with your clients.

What are the most important things to include in a business plan?

Two years ago, I asked 40 sophisticated investors, advisers and entrepreneurs what they most like to see in business plans. The survey included VCs, social investors, technologists, business angels, private-equity firms, accelerators, government agencies and lenders – as well as a few start-ups that had already raised funding.

Collectively, they told me that the executive summary at the front is most important. It should be simple, clear and specific on what the points of difference are in the business. This is where you can show the real value and grab the investor’s attention.

The next priority is showcasing, through research, that there’s a market for your product and that your product is addressing a real problem. You need to be able to answer key questions such as:

• Is your answer to this need or demand?
• Is it better than something else the investor could get hold of?
• How big is that potential market?
• How is this potential market changing?

It’s vital that you are able to show what differentiates you from other businesses. If you’re doing the same thing, at the same price, at the same place as someone else, you’re not bringing anything to the table.

Next, you need to address the experience and expertise of your team. Who are they? What have they done? It’s really important to be honest about this. It doesn’t matter if you’re a young team with less experience. You just need to be explicit about whether there are any shortfalls or gaps in your expertise, so the investor has the full picture. Do also mention people who are acting as your advisers and mentors.

And finally, having a revenue model is vital. Investors will want evidence on how people will pay for your product, how much they will pay, how you’re going to generate and increase income and, most importantly, where the potential profit lies.

How can technology businesses that are still at the pre-profit stage make their pitch more appealing to investors?

For start-ups, there’s quite a lot of free and reasonably affordable advice and business support, much of it online. Organisations such as the Knowledge Transfer Network provide plenty of resources, and there are seminars by educational institutions, trade associations, regional bodies and banks, as well as accelerator programmes. I’d highly recommend making use of those as you develop your business.

If you’re an established business looking to raise millions of pounds, you have a complex or highly regulated business like financial services, or you have a lot of employees, you’ll need expert advice from chartered accountants and lawyers, and (for bigger deals) even corporate finance experts.

The Corporate Finance Faculty, which I work for, is one of those sources of expertise and networks of professional advisers.