Successfully obtaining funding, is partly to do with how well you have planned your business development, but it's also to do with how well you understand how an investor's mind works - what turns them on, and importantly, what turns them off. Understand those factors, adjust the presentation of your plan accordingly, and you will have greatly improved your chances of achieving a successful outcome.

The following guidance is given by James Wigzell, previously CMR's Investment Director (now Director for CMR's Self-funding Business Loan Programme), and by Brian Wood, CMR's current Investment Director:

Private investors have a very wide range of personal backgrounds and skills, but these are not necessarily relevant to their interest in a proposition - although they can be helpful in providing a suitable match where the entrepreneur is looking for a particular skill supplement from his investor. However, an important factor is frequently the investors often-quoted wish to be 'within two hours, or 50 miles' of where he/she lives.

The real key to successful investing is to have a thoroughly good business plan that demonstrates a sensible and well researched business opportunity. This needs to have all the standard features expected, in addition to which we can highlight the following essentials, in an approximate order of priority:-

1. Entrepreneur own cash in - and at risk before the investor's.

2. Excitement factor - be it making lots of money, or a particular industry hype.

3. Personal chemistry between entrepreneur and investor - absolutely vital.

4. Personal involvement of the investor - must match the requirements of both.

5. Good gross margins - for profit and business resilience against adversity.

6. Exit route - so the investor can see how his rewards can be realised.

7. Good patents - where these are appropriate to the business.

8. Sound specific use of the investor's money - tangible assets are comforting.

Equally important as 'don'ts' or 'bewares' are:-

1. Not repaying the entrepreneur directly out of the immediate investment.

2. Not funding initial high salaries, expensive cars or other superfluous overheads.

3. Not funding completion of R & D or market research - product to be complete.

4. Caution over business where market access is controlled by big players.

5. Considerable concern over software based businesses.

6. Property based businesses are likely to be steady and lack the excitement factor.

Further advice from Brian Wood (CMR’s Investment Director)

Investors

Investors are a varied bunch. There are professional investors working through funds with millions to invest, to 

small investors who might have retired early with a good final payment, prepared to put £50,000 into a company as a speculation, perhaps providing a continuing interest.

Propositions

It is not possible to say which propositions will be funded and which will not. But it is possible to define the characteristics of a project likely to be funded, and also to list the apparent turn- offs.

Before a project can be presented to an investor it should contain

1.1 If an existing business, up to date audited P&L and Balance Sheet. This is the company into which the investor is buying. If the accounts are getting out of date, then some idea of what has happened since is useful.

1.2 A business plan should have an Executive Summary and a contents page. There would normally be sections on

- The product, whether new or improved or whatever.

- The market, whether existing or to be developed.

• Management details.

• Funding required and what it is to be used for.

• Forecast sales, margins, overheads and profit.

• Forecast cash flow.

• Forecast Balance Sheet.

• The management details and the detailed financial information would usually be in appendices.

The business plan need not be in great detail; a punchy few pages with all the necessary information, is better than a computer generated plan, with hundreds of pages, and sheets and sheets of accounts.

It may be good to detail the proposed arrangement and possible exit route, but not essential as the investor will negotiate his own deal, and make his own judgement about getting out.

Characteristics of a good proposal

2.1 Development of an existing profitable business. Could be a new product, cash to finance working capital for growth, or any natural development. It is important to adequately explain what the business is about and in objective terms, why an investor should get excited about it.

2.2 Existing proven management.

2.3 Good gross margins. This leaves room for unexpected downturns.

2.4 Not too high expectations on market share.

2.5 If a start up, commitment and cash from the management team before investor cash is put at risk.

2.6 Realistic assumptions.

2.7 There has to be something genuinely new or different. No point in trying to do something already being done.

2.8 An investor would like to see the company taking advantage of all other funding sources, as this can improve the gearing of the money he puts in.

Turn offs. This is much easier - in no special order

3.10 Start ups. These have to be good to get funded, but some investors are looking for them.

3.11 Products dreamed up by technical wizards, which might be amazing, but for which there is unlikely to be a market.

3.12 Products which still need development - a black hole.

3.13 Global launches. Prove the product and the market first.

3.14 Ideas which would be better licensed to someone who already has production or marketing capacity.

3.15 Investment to be spent on PR, advertising, or directors' salaries. All potential black holes. Investors often (but not always) prefer to see their money spent on something tangible. If not assets then working capital.

3.16 Where the best route would be F & F (friends and family) or industry contacts. This includes films, music, games, nightclubs, or indeed any media or trendy retail proposal. This is not to say that external investment cannot be attracted, but it can be more difficult.

3.17 Where there will be no eventual value in the company to be realised. This happens where the promoter is really only trying to set himself up with a job for his lifetime. Also applies where the company is too dependent on one person, the goodwill would go out of the door with him if he leaves.

3.18 For the time being dot coms. This does not mean that e-commerce is not the way forward, but the project should be commerce driven not internet driven. Most companies will in future use the internet, but just because it uses the internet, it doesn't mean it is sure to be profitable.

3.19 Property. Property speculators work on their own, or with colleagues. We do have some investors who are interested in property investment, but as a generality there needs to be a trading aspect to the business.

3.20 Where the funds looked for are out of proportion to the share in the business offered. Classically the sort of start up where the company has no opening value, the management team have put in £20,000 and their time and effort, and are offering 15% for £300,000 or more.

In an existing company goodwill can be calculated from historic profits. The management team should expect to give away slightly more equity than the investment is worth, to attract that investment. Or a complicated arrangement of convertibles which is best left for negotiation with the intending investor.

3.21 Where the assumptions are too good to be true - 600% return after two years - or positive cash flow after six months - £15m sales in year two from a standing start. While the returns might look good, the forecasts are unbelievable, and the whole proposition lacks credibility.

3.22 Rescues, unless an investor has said that is what he is looking for. There are however some investors who specifically look for turnaround situations.

3.23 An investor would normally wish to take a stake in the holding company. It is a turn off if the investor is asked to take a stake in a new subsidiary, particularly if the management is the same as the holding company, and admin. services are provided by the parent company and paid for by a management fee.

It is worth remembering that an investor’s interest is excited by the product, the opportunity, the market or whatever. The business plan then consolidates his interest, or turns him off.