Part 3: A step-by-step guide to raising finance
What to consider when raising finance
Raising finance is not a linear process and an organisation should look at using multiple forms of finance simultaneously in each phase of its journey. It is also important not to become dependent on one form of finance or the other and more broadly on external finance all together.
Co‑ops should aim for a business model that generates sufficient revenue to sustain the business over time and reduces the need to depend on external finance to survive. A business will be sustainable as long as there is adequate demand for its products and services, that the costs to carry them out are proportionate and the processes to deliver them are efficient.
Whatever phase you are in, if you decide to raise external finance, you will need to be investment ready and know your funding runway and justifiable ask. You must also have a clear idea of what risks you want to take and what returns you are prepared to offer to your funders and what relationship you would like to have with them.
Investment ready
Being investment ready means being prepared for the questions your funders will ask about you and your business before providing you with funds. How much information you provide will depend on the phase you are in, the type and the scale of the funds you are seeking and the type of funder you are engaging with.
In this chapter we provide some minimal guidelines, but each funder will have their own requirements or aspirations. It is good practice to focus on having everything in place to be investment ready as soon as you enter a new phase, so that if new opportunities arise, you can move quickly and not lose valuable opportunities.
Fundamentally you will need to be able to show you have a clear purpose, a compelling business case, a team with the appropriate skills and a track record of delivering outputs.
Funding runway
A funding runway is the amount of time before your organisation runs out of cash. A start-up funding runway usually indicates the months that it takes an organisation to “take-off”. If the runway is too short, the start-up won’t have enough time to launch; if it is too long, it might become too expensive.
Your funding runway should help you determine your justifiable ask, the amount of funds you need to take you to the next milestone, which, at the start-up phase, should be no more than 18 months away.
Risk
You should have clarity as an organisation about the levels of risk that you are prepared to take. Every business carries a certain level of risk determined by internal and external factors:
- A risky enterprise has the potential for both high returns and disappointment and can be both stressful and exciting.
- A low risk enterprise will tend to follow well trodden paths and develop at a pace that allows it to take safe decisions.
Based on how risky your business idea or product is, you will attract more or less risk-averse funders.
High risk ideas might be easier to fund with grants where monetary returns are not expected. In the case of debt and equity, you might need to offer higher returns to your funders to compensate for the shared risk they are taking. You will also need to factor in what extra risk you are taking on as a business by offering high returns and what could happen if you are unable to deliver the agreed outputs or returns to your funders.
Involvement from funders
Each type of finance will also come with a different degree of involvement from funders. It is good to identify in each phase what type of involvement you are looking for. You might want to invite them to be members, or to join your board as a co‑opted member, or you might prefer to find funders that do not want to get involved in the business. There will be advantages and disadvantages to consider in each case depending on the stage of your business.