You do a lot of things alone as a business owner. With little external assistance, you have probably developed your own ideas, bootstrapped a large portion of your company, and reached your current position. However, there comes a moment when additional funding is required. Knowing how to locate investors is essential during times like these.
Investors are searching for the next big thing: a creative business that has the potential to make a lot of money. Do you believe this possibility exists in your startup? Knowing what draws investors is essential if you’re trying to raise money for your company. Your startup can grow with the support of the proper investors. Additionally, for those who are still in the brainstorming phase, an investor can be the difference between your concept ever coming to fruition or not.
Before we list the top ten things that investors want in their next opportunity, let’s make a clarification.
What distinguishes lenders from investors?
When determining the type of finance you require, keep in mind that investors and lenders are fundamentally different. Investors provide you money in exchange for a portion of your company, whereas lenders give you money with the expectation that you would pay them back with interest.
The investments from an investor can, therefore, be subject to limitations. For instance, some may want you to form an independent Board of Directors or demand their consent for transactions over a specific threshold. Additionally, before investing, you should talk to your lawyer about your rights as an investor.
Here are what an investor would be looking out for:
1. Your past performance
Seeing a return on investment (ROI) is the top priority for early-stage business investors. You’ll be 90% of the way there if you can show them that your company will generate revenue.
You must demonstrate outstanding financial performance thus far if your business has been operating for some time. (If your business hasn’t launched yet, you’ll need to rely more on your business plan’s estimates than on precise figures.) Investors will be looking for the following metrics:
Gross margin: Also referred to as “gross profit margin,” gross margin is determined by deducting the cost of items sold from your total business sales income. Investors can see how much a company makes from sales and administrative expenses by looking at this figure. That offers a reliable indicator of a company’s financial well-being.
Revenue growth, also referred to as “the top line number,” illustrates patterns in corporate income, such as how your company is performing now in comparison to, say, the same period last month or last year. Revenue growth can be computed for any given time period in a company’s history and is often expressed as a percentage. The equation is:
Revenue growth is calculated by dividing current period revenue by previous period revenue.
Monthly Recurring Revenue (MRR): The amount of money a business makes each month is known as its monthly recurring revenue. Investors can assess the consistency of your revenue by examining this figure across a number of months. Ad hoc events like marketing campaigns or product debuts can occasionally be the source of increases in sales and, consequently, profits. You want to demonstrate to investors that your cash flow is consistent from month to month as much as feasible.
Net income: Also known as the “bottom line” or “burn rate,” net income is essentially the amount that remains in the company after all costs, such as payroll, interest, and taxes, have been deducted from your total yearly revenue. In theory, a healthy business should have a positive net income, but this isn’t necessarily the case for startups that are still expanding.
Churn rate: Also referred to as the attrition rate, churn is the rate at which clients leave a business over time. This phrase is especially pertinent to subscription-based enterprises. You lose more consumers when your churn rate is high, which can have a detrimental effect on the quality of your products, marketing efforts, and retention tactics. Because of this, investors typically seek out low turnover rates.
Acquisition of customers: Low churn rates are also valued by investors because it is less expensive to keep current clients than to find new ones. Sometimes attracting new clients requires a significant financial commitment. Even while investing is essential to starting a business, investors will still consider these figures to assess whether your revenue growth will be sufficient to cover the continuing costs.
A company’s efficiency in using its workforce can be gauged by looking at its revenue per employee number. A high revenue-per-employee ratio demonstrates to investors how well your team is operating. On the other hand, the opposite may be a sign of ineffective management, excessive staffing, and other inefficiencies.
The quantity of cash that a business has on hand, or its immediate purchasing power, is known as liquidity. Investors might use this figure to determine whether the business can pay its bills in the upcoming year. Good liquidity might show that your company is not overextended and has reserves for unanticipated events. Once more, startups frequently lack adequate liquidity, but when paired with other indicators, liquidity can be a useful indicator of the company’s financial health.
2. A strong business plan
A strong business plan shows investors that you’re committed to your venture and have carefully considered how you want to turn a profit. No investor will give you money without a business strategy, as it won’t be sufficient to persuade them to support you. A business and financial strategy will demonstrate that you will continue to prosper in the future if historical performance data indicates that you have done well.
Your business strategy should contain the following, among other things:
- Your target market, supported by evidence that demonstrates why
- Hard-number, data-driven financial forecasts
- Sales channels, together with statistics demonstrating their efficacy
- Marketing objectives and plans, supported by data that demonstrates their efficacy
- An examination of your product or service’s competitors
- Estimated time frame for when you will begin earning money
- Possible roadblocks and your strategies for overcoming them
3. An original concept
The terms “new and innovative” thrill investors and the public alike. The simple truth is that your business is unlikely to succeed if the market is oversaturated with hundreds of identical products.
Explain to potential investors what makes your product or service unique. Is there a market for your special product? Does it address a special issue? Is it a recent invention or innovation?
You don’t need to have invented anything new, but you do need to demonstrate how your product or service differs from or outperforms what your rivals have to offer. This is your “competitive advantage,” or unique selling proposition (USP) in the business world. It’s what will set you apart from your rivals.
4. A consumer base for your goods or services
It is your responsibility to persuade investors that there is a sizable enough market for your goods and that you will undoubtedly find a place in it. Additionally, you must confirm that the investment capital you have asked for makes sense. For example, if you’re requesting $100,000 for a 10% stake in the company, you must demonstrate that there is a sizable enough market for you to grow into a multimillion-dollar enterprise.
To do this, first present facts demonstrating a sizable client base and market opportunity. Then, go into detail about how your company model sets you apart, how you have an unheard-of advantage, and what issue you’re resolving that your rivals aren’t. It’s much more important to do this right if you’re an early-stage startup looking for venture money and don’t have any prior performance indicators.
5. A compelling story
A number of pitches with hard data are presented to investors. What, then, influences an investor to select one company over another when they have comparable predicted returns? Your narrative. A compelling story about why this business is important to you, where the concept originated, and your future plans can influence investors, who are people, not machines.
What need will your company fill? What impact will it have on the world? Why is it unique? You may establish the tone and attract potential investors by telling your story at the beginning of your pitch.
6. Experience and background
Your company’s success will be fuelled by more than just your business idea. You are, of course, the other piece. Investors are aware that the founding team of a startup plays a critical role in determining whether the company succeeds or fails.
They don’t want to lose money because the management team or founders weren’t a good fit for a partnership or didn’t have enough market experience. For this reason, before making an investment decision, investors want to know about you in addition to your idea and financial estimates.
How much experience do you have in business in general or in this particular industry? Have you previously started a business? What kind of relationship do the co-founders have with one another? Does this team have a solid understanding of their business, brand, and market, or is it still figuring things out? As part of your pitch, you and your team will need to develop a strong case.
7. An enthusiasm for resolving client issues
When everything seems to be going wrong, a passionate entrepreneur will not give up, which is what separates them from a numbers-only business robot. Where others give up, a driven team continues to fight, develop new ideas, attempt new marketing tactics, and introduce new goods. Investors are searching for that kind of dedication and perseverance.
If everything else is equal, a driven businessperson has a higher chance of persevering through the inevitable challenges of launching a company and seeing it through to success. Investors want to know that your business is something you believe you were born to do, not just your job.
8. Preparedness for business
Many people have brilliant company ideas, but few have the motivation and resources to turn those ideas into a successful, profitable venture. Demonstrate to your investors that you are prepared to live the walk as well as talk the talk.
Is your business prepared to launch and succeed right away? The proper investors will be interested in your business if you can demonstrate that you have all the necessary elements in place since they will know that they will see a return on their investment shortly.
You must do your homework, including your business plan and market research, in order to demonstrate your preparation for the business world. Additionally, you must demonstrate that you have a well-defined plan in place (e.g., you have already secured the appropriate suppliers and a new location).
9. An excellent justification for the investment
Your investors won’t simply give you the money you desire and disappear. Once more, they have the return in mind. They will, therefore, want to know precisely why you require the money and what you intend to do with it. Your company strategy should include information on when they may anticipate a return.
Additionally, investors will be searching for an exit strategy, so you should consider it beforehand. Will you buy them out when they wish to sell? Can they sell to someone else? They won’t want to deposit their money in the first place if they don’t know they can withdraw it if things start to go wrong.
10. An unambiguous investing plan
The legal repercussions of purchasing a company’s ownership are something that investors will want to know you’ve already thought about. You must have a business plan in place that makes it possible for other people to invest. Additionally, you must have a well-defined plan for the investment’s operation. Will investors be able to vote on business decisions if they are shareholders or partners?
This includes having a precise value for your company, which will support your request for a specific sum of money in return for a specific percentage of the business. This entails creating a stockholder’s agreement that outlines each owner’s rights in detail, sometimes together with a company constitution. Included in your stockholder’s agreement should be:
- – Owners’ duties and rights
- – What occurs if the owner decides to sell?
- – What would happen if the leadership changed?
- – Among other things, what happens if the business closes?
- – Will shareholders receive dividends, or will the value of their shares only rise over time? If you intend to pay dividends, you must have a strategy in place for the amount, frequency, and contingency of payments.
Keep in mind that there will probably be some negotiating in this specific area. Your investors could ask for changes or additions to the stockholder’s agreement in order to obtain a larger stake at a reduced cost. Knowing that these concerns are significant and that you have already considered them will help you approach the negotiation with preparedness. This is one of those situations where you should definitely get legal advice. You don’t want to build a profitable company just to discover that you’ve lost control over your investors.
Putting yourself in the investor’s shoes
The goal of investing is to profit. Showing them that you will accomplish this and that you will do it more effectively than their alternative investment options is your job. Being prepared is the most crucial thing you can do to make a successful pitch. If you were the investor, what would you want to know?
Make sure your company plan is as solid as possible. Your narrative should be interesting and well-planned. You should have a clear idea of how the investment partnership will be set up and what you will do with the funds. Since the future is your top worry, demonstrate to potential investors that you are considering it.
Tips on how to be prepared for investors
Make sure your company meets all the requirements before beginning startup funding. To improve your chances of impressing investors, consider the following advice.
Make sure you have a plan for your business: Investors wish to steer clear of poor investments. Investors can get confidence from a business plan that demonstrates your seriousness as a professional with room to expand.
A business plan should include your company’s financial objectives, your business strategy, and the roles of any owners. If you don’t have a business plan yet, that’s the first step because it’s a requirement for doing due diligence before investing in and operating a business.
Although you can draft your own business plan, a business planning firm can provide additional information and raise the likelihood that a potential investor will find your plan comprehensive. You can also get help with a pitch deck from a business planning firm. A pitch deck will include details about your business and present them in a way that will convince possible investors. You can find templates for your pitch desk here.
Organise your finances: Having well-organised finances is beneficial whether or not you are an investor. Clean finances can help investors see your firm more clearly and demonstrate that you’ve got it together, much as a business plan can reassure them.
A profit and loss statement will provide investors with a brief summary of your business’s profitability, so make sure you have it ready to go. Along with trying to keep your operational expenses low, you should also want to have a good cash flow. Investors will be informed that your business is a secure investment by all of these factors.
Prepare to say “no” if necessary: Not every investor will be sincere or look out for your best interests. Nobody knows your business as well as you do. Never be hesitant to say “no” to funding if an investor looks to be trying to take advantage of your company or is giving you a lousy deal.
You do want funding and investors. However, choosing the wrong investor might lead to serious problems, exorbitant interest, or even catastrophic legal issues. It truly means being ready to say yes to your business if you are ready to turn down a terrible investment.
Use credit to augment your funds: Locating an investor takes time. You should have a business credit card in your financial toolbox even if you don’t have one.
By extending your current cash, business credit cards allow you to spread out expenditures and make payments over time. In addition to helping you buy the equipment and other supplies you need to run your business, they also safeguard your personal money against fraud.
Find investors who will collaborate with you. Just as no two companies are alike, no two kinds of investors are alike. Examine each kind of investor in detail, noting what they are seeking and what they are offering in exchange for their money.
Consider an angel investor rather than equity funding or venture capitalists seeking partial ownership if you wish to maintain complete control over your business. Keep in mind that some investors, such as accelerators and incubators, exclusively work with startups.
