When raising capital for your business, there are a lot of different things you need to get right in order to achieve success.
Most business owners focus on some of the most obvious aspects, such as the financial projections or highlighting the opportunity.
However, there are several other aspects of your business that a potential funder will want to be familiar with, which can have a huge impact on their investment decisions. One of these aspects is the alignment between yourself, and your potential funder.
Alignment between the business owner and those looking to invest in your business is all about seeing eye to eye on some of the most critical areas of your business.
This doesn’t necessarily mean agreeing exactly on the course of action to take, but rather it is about having a similar point of view.
The importance of this is that it sets the foundations for the many discussions you will have with your funder on all topics from new product launches, to major capital spend, to key hiring decisions.
It is counter-productive for a funder to back a management team, only to then go about making management decisions themselves. However, it is to be expected that any funder would want to be involved, to varying degrees, around key decisions that would shape the future of their interest.
As such, appreciating the necessity of alignment paves the way for an understanding to be developed between both parties. That understanding forms the basis on which future discussions will depend.
The risks of not getting the right alignment
The risks of not getting the right alignment between you and your funding partners can lead to chaos. This chaos will very quickly permeate through all parts of your business if left unchecked.
Lack of alignment also leads to mistrust and a feeling of not working on the same team. Consequently, the business suffers principally, because the appropriate census cannot be achieved on key business decisions.
You can probably imagine some of the problems this could cause on a day-to-day basis. In addition, a business owner’s credibility gets tested as the decision making process is disorganized and it becomes unclear what the right course of action is.
In my own personal experience, the risks of getting the alignment wrong, or failing to have any in the first place, has led to difficulty between funder and portfolio company. I have invested in at least one company where the CEO was, in hindsight, not aligned with me as an investor. The area of contention was a strategic one in terms of where to focus major business resources. As the rift became apparent, it caused huge disruption all around the business, which took some time to sort out.
So, where is alignment required in your business with funders?
First of all, the question you need to ask is whether or not you are aligned in your own interests in the business. That is, given you are asking lenders or investors to back you and invest in your business, have you and your senior team backed yourselves and put your own money in the business?
This is a big one for funders as it demonstrates intent, commitment, and focus. All of these are key attributes for business success that greatly influence a funder to support you in the first place. If that alignment is not there, it will seem to them as though you are hedging your bets and securing other options if the business does not work out.
The best way to demonstrate this alignment is to invest your own money in the business before you ask others to do so. Before any external fundraising, businesses typically grow some form of bootstrapping where the founders invest to test and gain initial traction with an idea. This is so that proof is there for funders and so that you know you have a viable business to work on.
Another important area for alignment is in the medium term direction of the business. Typically, funders will help your business through a stage of growth, usually over three to five years. Over this period of time, it is important that there is mutual understanding and agreement on the right direction to move the business forward in and to focus key resources on.
In some cases, it will be the longer-term future of the business that needs to be agreed upon between all parties. For example, for equity investors in particular, you need to have similar views on an exit strategy. If one party is building a business for it to go public versus the other that is building it for a trade sale, there will be differences in the way you build the business in order to attract the right buyers at exit.
The final area where you need to strike alignment is around the role both parties will play once the funder is on board. In bringing an external party on board, you are now in a partnership where both of you have a vested interest. Therefore, you cannot view the funder as a silent partner—they will have a lot to add. They will also want to ensure that their investment is being managed responsibly. As such, you need to come to agreement on the right levels of involvement, and in particular, the level, nature, and frequency of information that is made available to the funder. You will have to get comfortable with a level of transparency that you are not familiar with.
Alignment with a funder not only helps you secure funding easier, but also ensures you secure funding from the right partner.
It is a good test for both parties to understand if the relationship will be a good fit. Deciding to raise funding means you are open to the idea of working in partnership with a funder, so you need to make this relationship work.