Owning your own business is an exciting venture in life. Most small business owners do not start a business with it crammed full of capital. Investors, therefore, play a big role in the startup and growth of a company. Using investors is a great way to take your business to the next level if it is already flourishing, but demand is outstripping organic growth.
How do you turn this great idea into a reality? Similar to preparing to sell your business, you will need to have all the pertinent information collated and ready for them and be ready for a due diligence process. Read our articles “Due diligence when buying a business” and “How Do I Calculate The Value Of My Business” as part of your preparation.
Here is a list of factors that investors will look for when you come knocking.
What does an investor want to see?
Is there a dynamic market opportunity for the investor?
Opportunities and potential excite most investors, with the majority of investment going to new, promising sectors.They will look at your market share goals and your capability and potential to achieve them.
To do this, they will quantify your current position in the market and project, based on the data you supply them and their advisors’, your future position.
If you operate in a market where customers already have a lot of options, full of well-established businesses serving the same customers, then it is critical that you amplify your differentiator.
If you’re operating in an emerging market, then the market growth potential is a huge factor and its relation to macroeconomics.
Can you show evidence of astute project management skills?
Investors want to see a methodical approach to the planned and executed spending of their supplied funds. Strong project management skills are critical for the success of your business growth strategy, including strict and strategic finance and resources management.
Successful small businesses are often involved in many complex projects as they chase business goals.
Proof, to investors, of strong management of those projects, the business and other initiatives, and solid governance and discipline, will help them open their wallets.
What is the business’ human capital value?
Investors will need an assessment of the economic value of your teams’ education, training, intelligence, skills, health, loyalty and punctuality. You need to present how your team is well-positioned to build and execute your business plan. Will their skills drive sales, leverage marketing opportunities, and run the business efficiently?
In addition, you need to demonstrate the leadership and expertise you offer. Do you work well together without your team, or can it be fractious? Are you a thought leader or influencer in your market?
Do you deliver on what you say?
The investors will be very happy to see proof of actions taken by you that achieved or are achieving growth goals.
Hard facts that quantify successful forecasts will win many a wallet. In addition, evidence of market engagement with your product, including client feedback, will set your business apart from the competition.
Is your data accurate?
Get your data right – any error will slowly close the door of opportunity. A misrepresentation that is ‘caught out’ will slam the door. Due diligence will be done, and comprehensive, accurate data will instil confidence in the investors.
Are your processes and controls in order?
When your small business is booming, you are often spread thin. This might cause an overlooking of efficient processes and effective controls. Choosing speed over risk control also happens.
Investors will want current, detailed process manuals and proof of them being used. Expect surprise questions on this. Management must reflect your business strategy.
Do you do active risk management?
You will need to present your assessment of potential risks in your market segment and in the business as well as your actions to counter them. A viable contingency risk plan should also be in place e.g. how will you survive another pandemic economy?
Whether you’re seeking investment or not, you should have a risk register in place. The detail level depends on the maturity and complexity of your business and market. More investment needed = more details on risk needed.
Does your business have star quality?
What is going to excite the investor and win their favourable decision? It is usually linked to your differentiators.
Research your potential investor’s and see what they gravitate towards: corporate social investment, female empowerment, eco-friendly factors, music industry links – you will spot a trend.
What if you can’t find an investor?
Tahir Marfani, Digital Marketing Expert at AvinashI Ventures, is not afraid to grow a successful business without the help of an investor. He chose the bootstrapping option, a.k.a self-funding. His reasons for this were:
You have to be intensely revenue focussed
As a small business or a startup, you need to ditch any idea that doesn’t generate revenue from day 1. You are forced to build something worth paying for right now.
You cannot start a business without a concrete revenue model – put the tech crunch reading aside and figure out how to make some money!
Don’t raise funding
Fundraising devours time and can cause you to lose focus on your business and customers.
Time with investors is time lost for the improvement of your product, customer service and profits. Fundraising is not simple. It can take up to 50 meetings to get traction with a few investors, which will result in 1 term sheet, the negotiation of which takes 5 weeks alone.
An investor relationship is a marriage and will last as long as your company does. Investors need progress updates and will need consultation for major decisions.
At the worst, this will mean meetings, lots of excel dancing, negotiating sign off for purchases, or potential micromanagement. You have a boss.
You learn the value of money
Spending money will be painful and hence frugal – this is a good business habit. The opposite is a disastrous habit. Funding enables, unwittingly, overzealous spending.
Growth doesn’t have to be frantic
After the investment, things tick along nicely, your company is paying the bills, growth is steady, and you have loyal customers. Life is great. But then the investors knock on the door and say speed up. They want exponential growth, not “ticking along making nice profits”.
Even respectable numbers might now be enough, and you will be pushed to figure out a model with higher growth. You might have to change what is currently working well for you.
Some investors want massive growth with the risk of a massive fail – they don’t accept the middle ground.
Bootstrapper community member
Bootstrappers attract bootstrappers, and you will find yourself in a community of people running successful businesses, self-funded and just enjoying life.
No media hype, no dodgy value propositions, no endless reporting and huge pressure from powerful investors.
Not every small business has to go the investor route in order to grow. Research what it will mean in your life if an investor is brought on or not. It might be your dream to develop an exponentially growing business at a fast pace – then an investor will make your dreams come true!
The British Library is a great source of courses and recently presented a workshop called ‘How to Attract the Right Investors’ . It was aimed at “ambitious entrepreneurs who are either in the start-up phase and are unsure of where or how to raise the capital to launch or are already trading but need more capital to reach profitability and scale.”
Contact them for future dates on this course.
Lastly, read our article “What kind of business can I start with zero investment” for inspirational ideas on businesses if you don’t want to launch with investors. We also have more helpful business articles in our business development section. Learn more today!
We cannot control our luck, but we can control our effort and preparation – James Clear #hardworkbringsluck