WHAT ARE INVESTORS LOOKING FOR: 7 ESSENTIAL TIPS TO WIN CAPITAL!
Many entrepreneurs are good engineers, scholars or artists who believe in their ideas and setup businesses based on those. People like them are innovators but oftentimes lack a key skill which could allow them to spread their wings and taste success. That missing but indispensable ingredient is experience in the industry they are looking to innovate in. Fortunately for them, business can be learned, but how long will it take? You know how much time it took you to gain essential and relevant knowledge and experience, and how many times you had to fail to get to where you are. You have a BUSINESS IDEA, a great vision and maybe even tasted your first business success. You believe in YOUR PRODUCT but you need FUNDING to grow. It is a classic scenario. Unfortunately, it often happens that business founders do not know how to effectively gain investors’ trust, and make mistakes along the way to win it. Below we share our tips with you to help you avoid the most common mistakes made by new entrepreneurs.
Below are 7 ITEMS investors are most likely to focus on
Even if during the process of building your relationship with the investor, you are planning on using the help of an experienced adviser, you should always thoroughly prepare for the conversation! Crucially, when interacting with investors, you must remember that their main aim is to get A RETURN ON INVESTMENT. They put their money into growing companies/enterprises so that both, the company and the investor, benefit from it. If you are able to demonstrate your business’s profitability in the future, you have passed the first test. Now, the final exam…
NOW THE TIPS! 7 tips on how to win investor capital
Below are the main criteria investors take into consideration while assessing your idea. Those tips will help you prepare a perfect plan for your conversation and ultimately the most suitable offer for the investor. Get ready for the discussion and remember: we are all human beings (that also applies to investors!) Every one of them is different. To some, facts will matter, others will rely on their “intuition”. However, the common denominator for both of these types of investors is that they will always pay attention to how well you’ve prepared for the interview.
1. HARD DATA: COLLATE FACTS AND NUMBERS!
As already mentioned, an investor’s aim is to earn a return on invested capital. Your task is to show them your company is able to make that happen. If you have been running the business for a while, you need to show that you’ve had excellent financial results up-to-date. However, if you have not started your journey yet, you need to explain why (what stage you are at) and what your plans are for the nearest future (when are profits expected). A good method for that is to create a timeline with specific goals, outlining when you expect to achieve your development goals and when the investor can expect a return. It is also important to state whether you consider a possibility of exiting the investment, and if so, who will be its potential buyer in future, etc. In other words, you need a complete scenario of what will happen when you scale up your product/technology/service and a robust exit plan. It is also essential that you support your theory with examples, such as market reports, proof of concept, competitor analysis or target group data analysis, etc.
2. A ROBUST BUSINESS PLAN
A well-made business plan not only shows investors that you are serious about your company, but also that you have planned exactly how you will make a profit.
Your business plan should include:
- A market overview, which means estimating the size of the market and showing why this particular market is the right target for your product/technology/service;
- A financial forecast based on actual numbers where those are available;
- A sales strategy with data demonstrating why it is effective;
- Marketing plans and goals;
- Competitor analysis;
- A schedule, with a particular emphasis on when the company will start making a profit;
- A risk assessment with a risk response strategy.
It is important to remember that a business plan on its own will not be enough to win investors over, without it, however you will not get funding.
3. AN INNOVATIVE IDEA
Both — investors and the media — get excited when they hear words like “new” or “innovative”. The fact is, in a situation where the market is saturated with hundreds of identical products, yet another similar solution may be lost in an ocean of indistinguishable offers.
This is when your actual knowledge of the market really matters. Show your investors what makes your product different, prove that it really has market potential, or that it solves a specific problem in an unusual way.
Remember: it is not about “reinventing the wheel”, but showing why your product/technology/service stands out. If you successfully show your competitive advantage, maybe your company will be the one to meet the, yet unfulfilled, market needs.
4. YOUR STORY IS WHAT COUNTS!
Investors hear many stories filled with hard data. But what makes them choose one investment over another, when they both have similar predicted returns? The story of the founders and their product! Remember, investors are people not robots. They can be moved by a wonderful story about why your business is so important to you, how you came up with the idea for it, and why you put all of this time, effort and knowledge into it. In reality, investors invest their capital in the people who run the business.
5. BUSINESS EFFICIENCY
Many people with potential business ideas have neither the motivation, nor the means to use their concept and transform it into a working and profitable company. Show your investors that, not only can you talk about your business, but you are also ready for the journey! Being a visionary is not enough — show specific plans in which you demonstrate how you want to implement your vision.
If you are able to indicate that you have the key characteristics, you will attract investors’ interest, because they will know that sooner rather than later, they will achieve their return on investment.
How can you get there? Prove you have done your homework! Show you have created a business plan and defined what type of people you need to develop it. However, do not focus only on what you know. Talk openly about what you don’t know, where you lack experience, and where you may need the prospective investor’s support. Honesty and self-awareness about your strengths and weaknesses are important traits for an entrepreneur when engaging in business development. They help you gain the prospective investor’s trust! Remember, investors are usually highly experienced people in their industry, and so they are aware that perfect scenarios do not exist. That is exactly why investors will look for your weaknesses if you yourself do not point them out. And if they do not find any… they will walk away.
6. WHAT, WHY, WHEN…?
Your investors will not just give you the cash you need and wait a few years for the promised returns. First, they will require answers to their questions, such as: Why do you need the cash? What are you planning to do with it? When can I expect a return? What are the key investments and events throughout the life cycle of the company?
Investors will also expect you to determine an exit strategy. That is why you have to think in advance about when you might want to sell the business, go public or buy it out. Or maybe you know the market so well, that you are sure that large players or funds will potentially want to acquire your company once you reach a certain scale? Investors must know what the prospects are for the future and what profits they can expect once they’ve invested.
7. WHAT CAN YOU OFFER TO INVESTORS? The structure of the investment
The process of acquiring shares in a company has legal, compliance and regulatory consequences, and investors want to know you have already thought them through. You need to have thought of a structure that allows them to enter your business on certain conditions. It is crucial to know, not only how much you can give out, but also why this much specifically. Support your plan with facts and figures and plan out the course of the investment. In addition to thinking what percentage of the company you will give away, it is also important to plan what control instruments you have chosen. Obtaining legal advice on this is absolutely crucial, your legal representative will be working on your behalf to safeguard your best interest and business. This will allow you to focus on running the company, but you will also have someone to explain to you what the newly established relationship with your investor means in practice. There are numerous aspects you have to think through. Do it in advance and be ready to talk with the prospective investor as this is an area that requires negotiations. If you prove you are aware of the importance of these issues, and that you have thought about them beforehand, you will show the investor that they are talking to a serious partner.
In conclusion: investors are people who professionally support other businesses financially to make money. It is only when you demonstrate to them there is money to be made, that they may decide to invest in you. To be the first one to the finish line for investors’ money, train and prepare, because that is key to success. Your business plan should be detailed and have a brief summary; your story should be interesting and thought through; you should know exactly what you are planning to do with the money, when you want to do that, and how the investment will be structured. Show your potential investors you have planned ahead and that you’ve considered your exist strategy (not just the development stages of the product/technology/service), because that is crucial for them during their meetings with the founders.
Most importantly, you should always remember that you also have a say in this situation; it is not only the investor who chooses a company to invest into, but also the entrepreneur who chooses their investor!
By: Dorota Sajewicz, CEO/co-founder of BE THERE company representing investors and firms during capital acquisition and sale/purchase transactions.