How to attract investors

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 to value a business” as part of your preparation.

Here is a list of factors that investors will look for when you come knocking.

What do potential investors want to see?

Is there a dynamic market opportunity for early stage companies?

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, while judging viability by the problem you solve, signs of customer interest, and whether there is clear product market fit and market acceptance.

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 identify and analyse competitors and show how your offer differs.

If you’re operating in an emerging market, then the market growth potential is a huge factor and its relation to macroeconomics. Many startups fail because they misread demand—42% by one common estimate—so customer interviews and early traction metrics matter because investors look for evidence of market demand there.

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, along with complementary strengths and a proven track record. You need to present how your team is well-positioned to build and execute your business plan.

Relevant industry experience also boosts investor confidence that the team can execute. Will your founders give investors clarity on the opportunity, prove the team’s capability to deliver, drive sales, leverage marketing opportunities, and run the business efficiently?

In addition, you need to demonstrate the leadership and industry 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?

Investors will be very happy to see proof that you can prove traction, not just promises, and that your startup is achieving real growth goals. A minimum viable product (MVP) is essential here because it helps startups demonstrate market demand and traction early.

Hard facts such as early sales, customer acquisition, partnerships, or pilot engagement will win many a wallet more readily than a detailed plan alone. In addition, evidence of market engagement with your product, including client feedback, will set your business apart from the competition.

Is your data accurate for due diligence?

Get your data right, and be transparent as well as accurate, because any error will slowly close the door of opportunity with a potential investor. 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. Realistic projections and a robust financial strategy also help build trust and set clear expectations. Include financial projections and key metrics such as customer acquisition cost (CAC) and lifetime value (LTV).

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 investors and see what they gravitate towards: corporate social investment, female empowerment, eco-friendly factors, music industry links, or whether they are corporate investors focused on a particular sector – you will spot a trend. They can offer capital as well as strategic partnerships that help startups grow. In corporate venture capital, startups are assessed through both financial and strategic lenses, with backing aimed at returns and fit with the company’s goals.

What if you can’t find investors?

Do not be afraid to grow a successful business without the help of an investor, and if you cannot find investors right away, networking and targeted outreach are usually part of the process. Founders often find investors by building networks, attending industry events, and seeking warm introductions, and networking events are open to everyone for making connections with potential backers.

A mutual friend or colleague can make investors more interested and improve meeting chances by over four times, and outreach often takes several months to build relationships because investors prefer pitches that come through shared connections. 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 business idea that doesn’t generate revenue from day one. You are forced to build something worth paying for right now, and if you do a pitch for funding, it should clearly explain product value. A pitch deck should stay concise, often around 10 to 12 slides, and clearly state the funding request and how the funds will be used.

You cannot start a business without a concrete revenue model – put the tech crunch reading aside and figure out how to make some money! Founders should also prepare a practiced, adaptable presentation that uses storytelling and can work for anything from a one-minute intro to a longer meeting.

Don’t raise funding

Raising money is time-consuming and can cause you to lose focus on your business and customers.

Different investor types fit different stages: angel investors typically back pre-seed and seed-stage startups, micro VCs focus on pre-seed and seed-stage startups, and venture capitalists usually invest at Series A or later.

Time with investors is time lost for the improvement of your product, customer service and profits. To raise investment, founders often need 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.

You’re independent

An investor relationship is a marriage and will last as long as your company does. The right investor can add value beyond cash, and some startups backed by corporate investors achieve stronger financial outcomes when investors choose to invest based on fit and long-term alignment. 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, because venture capitalists typically invest in startups with a clear path to scalability, so this pressure reflects venture capital expectations for rapid scaling rather than steady profits alone.

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.

Conclusion

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. Take a look at 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.

It might be your dream to develop an exponentially growing business at a fast pace – if, so, then an investor might be just what you need to make your business ambitions be realised.