Raise Money: Why Choosing the right industry sector for your SME is so important
By Rishi Anand - Venture Giants Special report - Raise Money
This may seem a boring subject to most experienced entrepreneurs so I thought it appropriate to start with a question - a question you are bound to get wrong.
Q: What industry sector classification do you think Google should fall under?
- Search engine? (trick suggestion search engine is not an industry sector but I know it came to your mind!)
Wrong, wrong, and well - Wrong! Google is in fact in advertising (Media) as 97% of their revenues are derived from online advertising not from search engine activity which can be surprising to most. If you by the way happen to be one of the few entrepreneurs that knew the answer to this question, off the cuff, then this article is not for you, you actually probably know more than I do because I will be honest, when I realised this, it was a 'aha' moment for me.
This got me to thinking, if it is so easy to potentially place such a large, well established organisation in the incorrect industry sector than how easy is it for a small business to innocently place his business in the wrong industry classification when seeking to raise investment, and what are the potential consequences of not thinking through such a small error?
Placing your business in an industry sector will not only define what type of business you operate in to potential investors but will also attract different types of business investors with different investment agenda to your investment proposal.
Using the example above, think Google - now think of the investors that would be interested in the computers sector; then think of the investors that would be interested in the software industry and now think of the investors that would be interested in Media. Clearly three very different groups of investors with three very seperate investment agenda.
Angel Investors invest in businesses that are NOT capital intensive.
Think about this statement for a second. Angel Investors invest in businesses that are NOT capital intensive. So placing and presenting your business in the correct industry sector will immediately assure an investor that your business is not capital intensive and getting this right will ensure that the right investor will carry on to read and study your business plan and hopefully then move onto to hear your entire elevator pitch.
Getting the industry classification wrong however could mean not getting the investment AS the wrong type of investors will be reviewing your investment summary and proposal. Let us look at this point further. It is a well know fact that business angels tend to invest in what they know and understand and a business seeking to raise investment must never seek to raise a large chunk of money that will then take a lot of turnover to pay it back.
The golden rule here is that the more investment capital you seek to raise from an investor the more money you are going to have to turnover to make a return and the greater the risk your venture will then become to an Investor - hence the word angel investors like to use - Risk Capital.
Choosing the right Industry sector will immediately inform an investor whether your business is capital intensive or NOT capital intensive before the investor has even read the title of your business plan or heard your elevator pitch. So it is important for entrepreneurs to know:
What Industry sectors Business Angel Investors tend to avoid...
... and try to avoid placing your business in these industries. Business Angel Investors will tend to avoid capital intensive businesses that require vast amounts of Risk capital to set up such as setting up a hydroelectric power station or a wind farm, or a new car engine that can run on chip fat. If you are however looking to create a single rotary part that will fit into the motor of a wind turbine that will increase its longevity by 60% then placing your business plan in the energy sector will lose you potential investors that would have ordinarily may have been interested in your investment proposal. You would have greater success listing your investment proposal under Intellectual property or manufacturing to attract the right kinds of investors that would invest in something like this.
If you do happen to be an entrepreneur planning to set up a hydroelectric plant or a dam project then you are better of approaching Venture Capitalists (or similar groups like these) as entrepreneurs looking to raise money from angel investors must never make the mistake of asking for capital that will take a lot of investment in order to return it.
The more money you ask for the greater the return you are going to have to project to make and the greater the risk the whole project will become. So it is always important to demonstrate and highlight that your business is NOT a capital-intensive business.
This is one of the reasons why you will find media, leisure, or marketing start-ups much more receptive to Angel Investor attention as they typically require a lot less capital as well as providing a good opportunity for significant returns on investment for an angel investor.
In a 2009 research poll of over 500 entrepreneurs, Venture Giants asked entrepreneurs whether they knew and understood what sector their business was trading in and why they thought it was important for the purposes of raising investment for their business.
Not surprisingly, almost 100% ticked the box that they knew what industry sector they were trading in. However, when asked the follow-up question, why they thought a broad sector classification was important for the purposes of raising investment for their business, almost 40% of entrepreneurs elected to answer: ‘Not relevant to me’ or ‘not really important’ to that question.
But, the fact of the matter remains that it is not only important, but absolutely crucial in raising investment as business investors will have very specific skills and experience in areas they know and understand and will very rarely invest in businesses that work outside their area of expertise.
As a result, choosing the wrong sector in haste can cut out a large group of investors that may have ordinarily been interested in your investment proposal.
It is important for an entrepreneur to understand what their business does and how it can be classified and described within a broad sector classification that most Business Angels will know and understand instantly.
A handy guide to developing this aspect of your business specification can be found by looking at the London Stock Exchange which provides a useful list of sectors and industries.
Aerospace and Defence
Automobiles & Parts
Construction & Materials
Electronic & Electrical Equipment
Equity Investment Instruments
Fixed Line Telecommunications
Food & Drug Retailers
Food Producers & Processors
Forestry & Paper
Gas, Water & Multiutilities
Healthcare Equipment and Services
Travel & Leisure
Nonequity Investment Instruments
Oil and Gas Producers
Oil Equipment Services & Distribution
Pharmaceuticals & Biotechnology
Software & Computer Services
Technology Hardware & Equipment
Travel & Leisure
When an investor reads the Financial Times everything is broken down very simply by industry sectors and this is because investors do not have the time to research each company listed to find out what they do - investors instead usually know all of the companies listed in a particular industry sector.
Likewise business angel investors that are looking to invest in UK SMEs will know what type of business and industry that they are seeking to invest in and they will have to potentially review hundreds of business plans before they choose to invest.
As a result of this, the chances will be before even opening the first page of your business plan or hearing your elevator pitch the angel investor will first check the industry sector you are involved with. So whether you use Venture Giants to find an angel investor or you use another avenue, it is wise to keep your industry sector in alignment with one of the sectors that angel investors will tend to invest in (by the way, if you do choose to use Venture Giants, we will always double check the industry sector you are in so as to ensure that we send it to the right investors for you)
Never use creative or technical words to describe your industry sector even if you have a very specific product or niche solution that is not easily defined. Remember Business Investors will not necessarily have had your specific education or experience and will always look at industries that they easily understand.
(X) You are NOT an SEO company that optimises your business clients PPC campaigns and organic search results;
- Instead you are in Media.
(X) You are NOT a designer coffee outlet;
- Instead you are in Retail.
(X) You are NOT an online CRM solution that is seeking investment to take it to the next level;
- Instead you are in Software.
A good way to double check the industry sector your business should be in is to look in the FT and the London stock exchange and to locate the competitors listed within it that could be classed as your competition and and then to directly align your industry sector to them. Even if the listed companies are not totally identicle to what you are doing, it would still give you a clear indication of where your company should be listed as they would have already raised funding via an IPO and attracted the investors that they felt would be interested in their business model.
Aligning your company to your competition's industry sector will also ensure that you attract similar angel investors that would already be very interested in investing in that industry and may even already own shares in those listed companies.
What about IP (Intellectual Property), Commercial Licensing, and Research and Development?
Q: What broad sector classification do you think Intel is listed in?
- Computers and Software?
It may surprise you that Intel is in fact in intellectual property (IP) as they research and develop chips and subcontract manufacturing to third party manufacturers!
Always, think carefully about the sector your business should be in as getting this right will ensure that the right angel investors will read and study your proposal - and more importantly, invest!
By Rishi Anand
For and behalf of Venture Giants enterprises Ltd
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