Young entrepreneurs, who dream of starting their own businesses, have big dreams and great ambitions, but here’s what they don’t have – access to money. Building a business of your own takes time and money – a lot of it. So where will you look for investors? How to get the professional investor community to fund your business? Not easy at all!
You should be able to present your idea to them, attract the investors with your vision and show them how your idea is worth their money. You should be prepared to subject yourself to far greater scrutiny than you are used to, and even give up control over a percentage of your company for the investments.
This is a big ask for many first-time entrepreneurs, so before you go in search of investors, it is important to ask yourself if you need a professional investor at all. It is certainly possible to bootstrap your startup if you are starting from the scratch.
If it is possible for you to start your business on a low budget and build it gradually over time as you start making more money; that is certainly an option you should consider. This way, you will get to keep all of your money when your business turns profitable later. You can look for personal loans from family and friends as well.
However, not all entrepreneurs have this luxury, and so there is no alternative to them than to look for someone to invest in their startup. So what are the investors looking for? To get them to invest in your company, you should first have a good idea of what investors are looking for.
What Are Investors Looking For?
The only way to get investments from professional investors is to figure out what they are looking for and to meet with their requirements. After all, investors put their money into your business only if they can be reasonably confident of earning their money back later, with interest – or as in this case – with profits.
Investors don’t generally look to give loans, they would rather buy equity in a business and benefit later when it goes public or earn a share of its profits for years to come. So as a small business owner or the founder of a startup, you should show how your business in on the path to liquidity – how it will earn money for the investors in a fixed time frame.
Most private investors don’t put all their money into a single business or startup. They would rather hedge their bets and bet on 10 to 15 businesses, making small investments in each and hoping for at least a majority of their bets to pay off. Indeed, if even two or three of their bets pay off, they stand to make a huge return over their original investment and even recoup the losses, if any, made on the other investments.
Here’s what Your Potential Investors Want to Know….
Essentially, to demonstrate your business as being worthy of their investment, you will have to demonstrate the quality of your management team, the competitive advantage enjoyed by your product or service and the growth potential of your business.
- Does your product or service solve a problem or address a major and growing market need?
- How fast can you scale your business to profit from a market opportunity?
- Does your business have a moat – or a defensible competitive advantage?
- What about the management? What is your management structure and how do you plan to make it work to ensure that points 1, 2 and 3 are taken care of?
Making Your Business Attractive to Investors
So, how to make your business attractive to investors? How to grab their attention? How to form meaningful connections with them? How to attract them with your vision? Not easy, that we can tell you right at the start.
Don Rainey, a Virginia-based venture capitalist and a general partner at Grotech Ventures, says, “As an entrepreneur, you need to find investors that buy into the assumptions you have made about the future. If you don’t share the same common view of what’s possible, an investor won’t invest with you.”
Here are some suggestions that you can use to make your startup or small business attractive to potential investors.
Tip #1: Have your financials for the last 3 years audited or reviewed by a top rated accounting firm. This really helps to make your business look more credit worthy to investors or lenders and builds confidence in your startup.
Tip #2: Cut down costs as much as possible. Showing that you exercise complete financial control over your business and that you will make sure that every single USD or Euro of the investment is spent well will reassure potential investors. You should maintain a healthy cash flow for your business and wait for at least a year before seeking financial assistance from outside investors. Investors look for cash flow, more than anything.
Tip #3: You should be very clear about your objectives for the business. It is important to have a business plan and to use it to share your vision for the business. Tell your story to potential investors; explain why you want more investments and why you need to expand your business.
Tip #4: Management is the key to any business. Be honest with yourself – There are many who are great designers, coders or chefs – but they may not have the expertise to manage a business, company or restaurant. In that case, it’s far better to hire an experienced business executive to manage your startup while you focus on things that you are good at. A pragmatic management structure will help you get investment.
Tip #5: It is important to have an actionable strategic plan in pace that shows your growth potential. It should give your investor an idea of how you plan to raise capital and how their investment would help you meet your objectives and grow the business faster. Your plan should be realistic and take into consideration the realities of the marketplace.
Tip #6: Have a sophisticated sales strategy in place. If you don’t have experience in sales yourself, hire an experienced sales manager to run your company’s sales department. You will need to hire someone who has the expertise required to close deals and to increase revenue. Investors like a startup that has got its sales strategy right.
Tip #7: Hire an experienced lawyer, someone who has experience of working with startups and can help you during your negotiations. Your lawyer should be able to identify potential legal hazards well in advance and help you prepare for them.
Tip #8: It is important to be very patient when raising outside capital for your business venture. This can take anything from 6 to 12 months and there will be many occasions when you will be full of expectation and will have worked very hard on your presentation to a venture capitalist or an angel investor, only to be rejected at the last minute. At moments such as these, you will want to give up. Don’t lose heart, because there are several investors out there looking for the right opportunity, just follow the tips given here to present your business more attractively the next time you meet with a potential investor.
Finding the Right Investors for Your Business
So, how to find the right investors for your business? Not easy at all. You want to find investors who are the right fit for your business, and not just settle for someone because they offer you some money. Anyone investing in your company should bring something on the table – money, expertise, knowledge of the industry or reputation.
Today, there are a number of ways to get investment for your business. You can choose to get investment from an angel investor – a wealthy private individual who invests in startups hoping to earn a high interest on their investment later; you can choose to get investment from a private equity firm or a venture capitalist, who have a professional staff managing the investments and have great knowledge of the industry and its growth potential.
Or you can raise money on crowdfunding sites such as Kickstarter, Indiegogo, etc., where tens of thousands of people invest small amounts into your business, hoping to profit from it much later. Crowdfunding is a great way to look for funding for your business, especially if you have a new idea or an untried product for which it can be difficult to raise money from traditional sources of investment.
Compose a business plan that describes your company, what it offers and why it differs from others in the marketplace. Include startup costs based on research including leases, equipment and legal fees. Also incorporate revenues and costs for two years of operations that includes important personnel and marketing costs.
Compute how much you will need in startup costs based on the business plan data. Include basic startup costs as well as operational costs for two years. This may seem like you are asking for more than you need, but it shows you understand that development and growth do not happen overnight.
And finally speak with financial professionals about your company plan. Banks may have small business loan programs, but bankers, stock brokers and accountants may have other clients who actively seek small business investment.