It was challenging times for every business in 2020. For those young businesses looking for investment in their companies it was particularly tough. There seemed to be lots of money looking for a home, but it proved very hard to get hold of. Many investors took risk averse positions, waiting for the markets to settle down or looking to use the market conditions as an excuse to drive a harder bargain. Negotiating hard on valuations and trying to impose ‘overzealous’ shareholder agreement clauses. Even businesses that prospered in the pandemic had to work very hard to get investors to bite.
In 2021 there will still be a lot of money looking for a home and I suspect that money will still be hard to unlock. But I predict that whilst investors will still be choosy, there will be increased willingness to invest in good propositions at the right price. So how do young businesses unlock that money in 2021?
Here are 5 things to consider when looking for investment in 2021.
1.Back to basics
Investment seekers will need to present themselves as the best business they can be. Showing that they understand all aspects of their company. In 2021 the businesses that will find it easiest to raise money will have to be well run and have a number of proof points in their armoury. These businesses will be consistently demonstrating that they understand what they are doing and where they are going. What do these good businesses look like? As always it depends who is looking and how they are looking, but I would say that some or all of the following would describe a good business with proof points:
- A well balanced a appropriately experienced team
- A team with a shared view of the future
- A well defined market opportunity
- A proof of concept (does it work?)
- Some revenue (is someone prepared to buy it?)
- Repeat purchase (is someone prepared to buy it twice or more?)
- A thorough understanding of the competitive set
- If appropriate, some IP protections
- Has good financial disciplines
This is by no means an exhaustive list and will vary by sector. But if some of these points describe your business then you are well prepared for the questions the prospective investor will be expecting you to answer. If this list looks a lot like your company, then you should have the confidence to not just take the first offer you get. Have a look around and try and introduce some competitive tension into the process.
2. The Pandemic Effect
The pandemic will have affected every business. Start-ups and young businesses are no exception. For a good number of businesses, the pandemic will have offered a real opportunity for acceleration. It may have required a pivot in the business to get there by either changing the shape of the offering or the way that the offering is delivered. Whether your target market is consumer based or business based, their changing habits will have offered upside opportunities. Why is the pandemic affect important if you are looking for investment? Because if the performance of your business has changed significantly through the pandemic then you will have to be able to convince investors that this change and increased business is sustainable once the market returns to something like normality or a new normality.
Depending on the sector the business is in, some of the questions that will ned to be answered:
- Is remote working going to be a significant future trend?
- is online retailing the whole future?
- Will changing travel patterns continue?
- Will selling remotely be the future of your business?
Again, not an exhaustive list but growth in extraordinary times needs to be convincingly underpinned with a strategy to maintain that growth into the future.
Investors will look to downgrade current performance if they are not convinced on the sustainability of the recently acquired growth. This will be done through lower valuation multiples or a downgrading revenue achievements or both. This will be one of the major trends in fund raising processes in 2021.
3. Sustainability and Diversity & Inclusion (D&I)
The big cultural themes of 2020 are now moving to the centre of the investment world. Interestingly these themes are important for both sides of the process. It’s a pretty obvious trend to predict that there will be a huge growth in the number of investors/funds that will specialise in companies that are focussed on sustainability and D&I. This is already happening across all sectors. What this means for young businesses looking for investment is that they will need to have a well-developed view, and set of policies, beliefs and credentials around the following:
- How sustainable the product/service is?
- What effect it has on the environment and what is being done to improve the environmental effect?
- What are your employment policies around D&I and equality?
- How does your culture reflect this?
Being a new business is no excuse not to have these in place. For young businesses it is much easier to put this together than it is for established companies who have to undo a lot of previous behaviours. This is also a great way to help build a positive company culture that will be attractive to prospective employees. What is less obvious, is that there are a number of founders and CEOs of young businesses who are being more specific about understanding the credentials of the investors they take on board. These young businesses want to know what potential company they are keeping in the investment fund or the individual’s portfolio. I know of two investors who lost deals due to other investments they had made not sitting comfortably with the founders of the business being looked at. In 2021 there will be an increasingly two-way street on understanding of policies and credentials around sustainability and D&I. Investors will expect answers and an increasing number of young businesses will be confident enough to ask the same questions of the potential investors.
4. Valuation and Size of Raise
With money having been harder to raise in 202 and some market uncertainty still lingering, young businesses will need to think harder about how much to raise and at what price in 2021. In the past young businesses have been conditioned by the investment market; encouraged to go for as much money as they can, at the highest valuation they can achieve, and giving away big minority shareholdings to investors. The investors strategies have changed and are looking to drive down valuations using the uncertain times as the reason behind this. For 2021 young businesses should re-examine their investment strategy. Thinking much harder about how much money is really needed. Valuation setting has always felt like a macho competition that sometimes gets in the way of the real needs of the business. It doesn’t need to.
A lower raise at a reasonable valuation could naturally get the business to a more ‘sellable’ position and give them the opportunity to bring a larger amount and a well-deserved higher valuation. It might also mean that they will be dealing with the early-stage friends and family or individual seed/angel investors rather than the institutions. Helpfully this will bring a lot less clauses in the shareholders agreement. For a lot of young businesses thinking hard initially about the level of investment that is really needed, and at what valuation, could offer a completely different shape to their future.
5. Be Aware of the Trends
In the early rounds of fundraising amongst the institutions and some of the high-net-worth individuals there is definitely a tendency to look for the ‘trendy’ areas to invest in. These chosen areas can change very quickly, and businesses can be in and out of fashion very quickly. It’s not unique to 2021 as it happens every year but understanding where the trends are is very important. What tends to take businesses out of fashion is when there has been significant investment in a sector and that sector has had a series of failures. By failure I mean a business that failed to deliver significant returns to the investor. It’s important to know where your business sits in the ‘fashion’ stakes. It can make a massive material difference to multiples, valuations and the level of competition amongst investors. For 2021 there are a whole raft of sectors moving into the sweet spot for investors and a few former ‘darlings’ that will reappear as the world has changed. Some examples would be:
- Direct retail or food delivery (DTC)
- Anything commercial in the sustainable space
- Re-cycling or re-imagining or disrupting established sectors
- Health and wellness alternatives
- Bartering services and goods
SaaS and pure tech businesses in general will still be in demand. Within the tech sector one area that seems to be re-emerging is AdTech. It’s an area I know well. It was a really hot place to be 203 years ago and then went out of fashion. At the time all of the AdTech businesses I knew were trying to rename the sector they sat in. With online advertising and marketing performing really well through the pandemic the AdTech sector is now very much on investors radar. For 2021, as a young business it’s important to understand where the investor market sees your sector, and where you sit within it. Being in the trend sweet spot will definitely add to your valuation and help bring more than one investor to the table.
2021 should be a more settled year for young businesses looking for money. Money will have to be earned and bad businesses will, at best, attract bad money. Good businesses and ideas should enter the market well prepared and confident. The 5 points above are just some of the influences that I think will play a part in fund raising for 2021. By their nature they are general points, and every fund raise is unique and different.
If this article has been of any help or interest then you might be interested in my book The Money Train: 10 things young businesses need to know about investors.
It is a guide for young businesses looking to raise funds and helps them prepare for what is always a distracting, exhausting and future shaping process.