Top 10 mistakes developers make when approaching private investors for funds
This is a purely personal view – but it’s based on experience. We are often approached by UK property developers who want help in raising funds. Here are the top 10 mistakes from my perspective:
1 July 2016
1. Just sending a spreadsheet
This happens all the time. It can be the best project in the world, but you’re leaving it to prospective investors and their advisers to trawl through your numbers and work out why.
2. Just relying on glossy brochures
You know what it’s like when you go to a conference or corporate event, and you’re given a goody bag with fat, glossy brochures. For about 3 seconds you’re impressed. After about 30 seconds you’re slightly resenting how heavy it is. After 45 seconds you’re looking for a bin you can discreetly dump it all in, feeling guilty about the number of trees which have needlessly sacrificed their lives. Glossy brochures are great, but they don’t do all the work you need to really sell your projects to investors.
3. Leaving out the basics of the project
Why this property? Why this location? Why this approach? How and when will the exit be arranged? What’s the projected return for investors? Why should investors believe in the appraisal valuations? What’s the back up plan? Where does the rest of the financing come from?
4. Not explaining your personal background
A project is just a project, and projects end up looking very similar on paper, no matter how good your explanation of them. A key element is your personal background (and that of your team). You need to paint a picture, and give something (or rather someone) that prospective investors can believe in. If there is anything about your background that could potentially be perceived as negative, explain it. Don’t be reckless with the reputations of the people who may be helping you to pull your project together.
5. Not explaining your track record
If you can, get really specific – it’s a critical way of building believability. If you can, get testimonials from investors or partners from previous projects.
6. Making unsupportable claims in your literature
Also something we see all the time. There is no need for superlative claims about the property market in whatever sector or region you operate. You need to make sure that every single line in your materials is backed up by hard evidence. Two reasons for this: firstly, the possible legal exposure. Secondly (and probably more importantly), it undermines you, because it suggests you think there’s something missing from your “real” proposition.
7. Putting yourself and others at risk by creating an unlawful financial promotion, Collective Investment Scheme or Alternative Investment Fund
Yes I know, this is something that lawyers raise, and you may think you’re not interested in this kind of “technicality”. But fundamentally it’s not worth putting yourself or your business partners at risk of fines or prosecution by getting on the wrong side of the Financial Conduct Authority. It’s not difficult to get it right.
9. Not focussing on “ideal” investors
Developers are often attracted by the idea of creating a “crowdfunding” platform for their projects. This is certainly achievable, but generally speaking, it is more effective to focus on investors who are able to contribute larger amounts, who already have experience of investing in projects like yours, who are able to move quickly and who are likely to want to make repeat investments.
10. Not offering clear proposed terms for your prospective investors
This is another thing we see all the time – a request for introductions to investors, which would appear to lead to vague conversations about “partnering”. If you want a particular result, you need to take charge and show the confidence of offering arrangements which create attractive returns for all parties involved. Be very clear about what you will offer, how investors will be protected, how much you will be co-investing (if you are), how the control will work, and so on.
If you would like help in preparing your projects for investment, please call us on +44 020 3432 3269. We will be delighted to help.