In the ever-evolving landscape of entrepreneurship, start-ups and early-stage businesses play a pivotal role in driving innovation and economic growth. However, the path to success for these ventures is fraught with challenges – one of which is securing adequate funding.
When it comes to attracting investment, understanding what investors seek in start-ups can be crucial. In this article, we identify some of the key elements businesses should consider when they’ve got an eye on raising capital.
Get it right from the start: Implement the right business structure
Selecting the right business structure is a foundational decision that can have far-reaching implications, including influencing how the business is managed; how it adheres to possible regulatory requirements; or how an eventual exit event can or is able to take place.
Furthermore, different business structures have different tax implications, and where a sole proprietorship or partnership typically passes profits and losses through to the owner’s personal tax return, a corporation may face double taxation (once at the corporate level and again at the individual level). The right structure can help minimise tax liabilities.
Whilst every founder’s needs and ambitions will differ, often it is a key priority to maximise a business’s ability to access capital. Choosing the right business structure to make the business an attractive option to investors or for raising funds via other means should be carefully considered at the outset.
It is likely that incorporating a company is the best way forward. Forming a proprietary limited company is a popular choice for attracting investors as it offers limited liability, meaning investors’ personal assets are protected. It is also a formal structure that can issue shares, making it an attractive option for equity investors, and offers several tax advantages for investors.
What’s the plan? Develop a clear business model
Investors place great emphasis on the viability and scalability of a start-up’s business model. They seek ventures with a clear revenue model, a solid understanding of their cost structure, and a plan for sustainable profitability. An effective business model outlines how the company creates value, monetises its offering, and acquires and retains customers. Furthermore, investors look for businesses that can scale rapidly and efficiently, demonstrating the potential for substantial returns on investment.
A well-defined and scalable business model is especially crucial for financial services and tech start-ups where risks – but also returns – may be higher. A strong, revenue-generating strategy is a key factor, especially if the business is offering innovative and disruptive technology or solutions. They want to see a unique value proposition that sets the start-up apart from competitors and solves a real problem in a novel way.
If the start-up is technology-driven, investors will also assess the strength of the technology and any intellectual property protections, such as patents, trademarks, or trade secrets.
Tread carefully: Get advice on risk management and compliance obligations
Specialist legal advice is an essential ingredient for any business in ensuring the right balance is struck between financial risk and opportunity, whilst also ensuring regulatory compliance and avoiding pitfalls long before they become a cause for concern.
This is particularly prevalent for businesses operating within the financial services sector, where they must be aware of, and adhere to, a raft of complex regulatory laws. Failure to achieve compliance can result not only in financial and operational penalties, but can also have a significant impact on reputation – something which can come with its own knock-on commercial consequences down the line.
Mapping out a clear plan to handle regulatory requirements can act as an important framework for achieving success and attracting investment. Demonstrating traction and the ability to surpass certain milestones are excellent indicators for investors to make an assessment. Investors prefer start-ups or early-stage businesses that have made progress in validating their business model and achieving key milestones. Tangible indicators of success, such as revenue growth, licensing approval, customer acquisition, partnerships, or product development milestones, provide proof of concept and reduce perceived risk.
Sign on the dotted line: Put robust commercial contracts in place
Robust commercial contracts are essential for establishing and maintaining healthy business relationships and providing a level of certainty for future success. They provide a structured framework for conducting business, protect the interests of all parties, and help ensure that the business operates smoothly and profitably.
Well-structured contracts include provisions for risk mitigation, such as performance guarantees, warranties, indemnification clauses, and limitation of liability clauses. These mechanisms provide investors with a level of assurance.
If a business has valuable intellectual property (IP), such as patents, trademarks, or copyrights, contracts can define the ownership, usage rights, and protections associated with that IP.
The same level of contractual prudence should be extended to the very investment that many are seeking for the business. When drafted effectively, these contracts can provide a strong foundation for a successful investor-start-up relationship. Protections afforded by such a contract may include rights to information, governance rights, and protective provisions that prevent certain actions without investor consent. Commercial contracts should ensure that both parties are in compliance with relevant laws and regulations, including securities laws governing investments.
In the competitive world of start-ups and early stage businesses, securing investment is a pivotal milestone on the path to success. Investors carefully assess numerous factors when evaluating potential ventures. Understanding what investors look for enables entrepreneurs to focus on areas that will enhance their attractiveness to investors. By developing a compelling and scalable business model, a strong and capable team, demonstrated traction, and a clear competitive advantage, start-ups and early stage businesses can increase their chances of securing the funding they need to fuel their growth and realise their vision.
Madison Branson Lawyers has extensive experience advising non-bank lenders, borrowers, and investors in relation to start-ups and early-stage businesses. Our team often facilitate high-value loan solutions, assist with various forms of capital raising and provide advisory solutions to scale and grow businesses across a range of commercial projects.
In parallel to financing matters, we also work closely to assist fledgling businesses structure themselves to the needs of their founders and team.
Get in touch with our team for assistance with financing or securing investment for your business.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only.