Top tips for attracting investors as a spinout

A spinout forms when there is the possibility that new intellectual property can create new commercial opportunities.

Spinouts often require significant funding to get going and one of the top ways of bringing in new capital is through equity finance.

Unlike other financial products such as business grants or debt finance, equity finance involves selling a stake in your business to an investor.

The most common equity finance type for a spinout is angel investment.

In addition to the valuable capital, investors may also offer their expertise and use of their network of contacts to help a business grow.

The equity finance market is extremely competitive so entrepreneurs must pitch to investors, seeking to persuade them that their business is the right one to inject capital into.

In this article, we’ve collaborated with Dr Dave Hughes, CEO of Novosound, and veteran of multiple fund raises to share his top tips on attracting investment.

Novosound was founded in 2018 and was the first spinout company from the University of the West of Scotland.

The vision of Novosound is ‘ultrasound integrate everywhere’.

They use a novel manufacturing method for ultrasound sensors with thin film technologies to push ultrasound from the hospital, to the home and on to the person with their wireless wearable ultrasound platform.

This includes products and customisable solutions for emerging applications in industrial, medical, and wearable markets.

Pitching is a performance art

In many ways, an investment pitch is a performance, you may have your script and a slide deck to support you but ultimately, it’s about connecting with what you know and delivering that to the audience authentically.

As with any performance, practice makes perfect but don’t learn it by rote – be natural and talk about your business as you believe it.

It can also be a good idea to go to pitch events to see other entrepreneurs deliver their business pitch.

It’s worthwhile remembering that investors invest in the entrepreneur, sometimes more than their business, so be ready to sell yourself as someone an investor would want to work with, as much as the product or service your business will provide.

On the flip side, ensure that you can see yourself working with those investors as they are going to be part of your team moving forward.

Once you’re ready to start having conversations with investors it’s time to begin reaching out to investor groups to book meetings.

You should be prepared to speak to a large number of investment groups during your search for funding but don’t merely play the numbers game, target specific investors for your business – don’t go pitching to fashion-tech if your business produces semiconductors!

Research, prioritise, and reduce the numbers to increase the success rate.

It’s common for an investor to invest in only one or two businesses per hundred pitches they see, be the one that’s for them, and not the 99 that are noise.

Read more about how to create a pitch deck for investment.

Understand your value

As a founder, the valuation of your business matters at every round of investment, even at the early stages.

The valuation that your seed round raises at will have implications on your cap-table going forward.

Strategise and draw up multiple scenarios to ensure that you are getting the most for your equity and how you go about the capital requirements for your growth.

On the investor side, typically, they might be looking for as much as ten times the return on what they originally invested.

Understanding how much your business could be worth in terms of where its market is growing is key to making the right decisions for the long-term future of your business.

If your business is worth £20m post investment today, could the markets you’re selling into support a £200m sale in five to ten years?

What about after further rounds of growth funding?

Learn how to value your company.

Give yourself enough time (and money)

Raising money through investment can be a very lengthy and time-consuming process.

It can sometimes take nine months or longer between beginning a funding raise and the funds hitting your business’s bank account, and perhaps longer if it’s a university spin out.

To alleviate this, give your company a good runway between rounds by raising more money than you need.

The first capital raise is likely to be the most difficult and will take the longest amount of time.

It’s a good idea to always have the next round of funding in the back of your mind but entrepreneurs can also often find themselves side-tracked by seeking funding, taking their focus away from running their business.

Learn more about the different equity funding stages.

Your cap table is key

A cap (short for capitalisation) table is a document that lists who has an ownership stake in a business.

The cap table will list all the securities of a business including shares, convertible notes, warrants, and equity ownership shares.

It’s a good idea to keep a very close eye on your cap table and aim to be approaching a Series A funding round with at least 60%-70% of equity still in the business with the management team and founders.

If you are able to do this, you are more likely to attract top Venture Capital funds.

Negotiating with Venture Capital firms is different to raising money via Angel Investment so be sure to have a thorough understanding of this type of funding and have a lawyer onboard before seeking out meetings with Venture Capital investors.

Learn more about Venture Capital.

Plan for success

Having the right people around you as an entrepreneur can be more valuable to the overall success of a business than whether or not you have the right business idea.

It’s a good idea to bring a Chief Financial Officer (CFO) onboard as soon as possible.

A CFO is a financial expert who can help build your business and put in place strong financial foundations.

This position, alongside a lawyer and an accountant, will help you navigate the investment process and will be invaluable in helping you secure the right deal for your business.

Having that expertise on hand will also speed up the decision-making process.

It might also be worth exploring grant funding before seeking equity investment.

A business that is successful in securing a grant could appear a more attractive proposition to an investor as a grant provider has already endorsed your business by awarding a grant.

Having grant funding in place might also de-risk the investment for the investor.

This could be especially helpful for pre-revenue businesses seeking funding, a common occurrence with innovative spinouts who won’t necessarily have the track record available of businesses in other sectors.

Read our article on business grants.

For more tips on how on attracting investment, read our guide on How to get investors interested in your business.