Let’s face it, starting a business can be expensive. Few entrepreneurs have the cash on hand to get the ball rolling without outside help. Whether you’re starting a small business or looking to grow your business, you can seek financing through a traditional loan, a microloan, or cash from your friends and family. You can also seek financing from investors, so it’s important to understand what investors are looking for before investing.
Remember that investors are fundamentally different from lenders, and you’ll need to keep that in mind when deciding what type of financing you want. lenders give you money and you pay it back with interest. Investors give you money in exchange for ownership of part of your business. Your investments may have restrictions, for example, that you must obtain approval for transactions over a certain dollar amount, or that you must establish an independent board of directors. and investors also have certain rights, which you should discuss with your attorney before participating.
Reading: Why are investors important
Investors can be a great thing for your business. First, an investor does not demand payment every month because it is not a loan. An investor can also be a trusted source of trading advice and may have a strong trading network that you can draw on. but this is not free money: your investors will have certain expectations.
If you decide you want to seek financing from investors, how do you attract them? What makes them decide to invest money in a business?
the most important
More than anything, investors want to see a return on their investment. Investors are in the business of putting money into growing businesses so they can make money. if you can prove that your business will make them money, then you are 90% successful.
While all investors will want to make money, the hard part is knowing how to engage each potential investor in a way that piques their interest. Remember, at the end of the day, investors are just people – each investor will have different pain points and different sets of intangible criteria for how they arrive at investment decisions. some investors will stick strictly to numbers, while other investors will base their decisions on a gut feeling.
Here’s how to hit all the points for potential investors so you’ve covered all the bases as best you can. We break down the top ten criteria that many investors will use so you can develop your best possible plan and presentation to raise capital for your small business financing needs.
1. hard data: process the numbers
Let’s start with the hard data. As we have just seen, investors want to make money. it’s your job to show them that your company will make that goal a reality for them.
If your business has been in business for a while, then you need to show that you have had excellent financial performance so far. If your business hasn’t started yet, then you need to show what you can expect to generate, when you’ll hit your target numbers, and when your investor can expect to start getting their money back. In other words, you need a really solid (and well-supported) business plan.
2. a rock-solid business plan
A solid business plan shows investors that you are serious about your business and have thought through your plans to make money. While your business plan alone won’t be enough to convince investors to back you, no investor will invest money without one.
Among other things, your business plan should include:
- your intended market, with data showing why that market is your target
- financial projections based on hard facts and figures
- sales channels, with data showing show why those channels will be effective
- marketing plans and goals, with data to show why those plans will be effective
- competitor analysis for your product or service
- projected timeline for when you’ll start making money
- potential obstacles and your plans to address them
3. a unique idea
Investors and the general public alike rave about the words “new and innovative.” The bottom line is that if the market is saturated with hundreds of identical products, your business is unlikely to be a huge success.
Convey to investors what makes your product or service stand out. Is there market potential for your unique product? does it solve a unique problem? Is it an innovation or a completely new invention?
You don’t have to come up with an entirely new invention, but you do need to demonstrate why your product or service is different from or better than what your competitors offer. in business terms, this is your “competitive advantage”. it is what will make you successful over your competitors. It can also show that your business will fill an unmet need, such as a bakery in an area that doesn’t already have one.
4. a strong narrative
Investors hear many arguments packed with hard facts: Given two companies with similar projected returns, what makes an investor choose one over the other? the history! Your investors are people, not robots, and they can be swayed by a grand narrative about why this business is important to you, where the idea came from, and where you plan to take it. What need will your business satisfy? how will the world change? what makes it special? In fact, opening your presentation with your story is a great way to set the tone and engage your potential investors.
5. commercial preparation
Many people have potential business ideas, but not many have the drive and wherewithal to take those ideas and turn them into a financially viable business. show your investors that you can not only talk, but that you are ready to walk the walk.
Is your company ready to take off and start operating? If you can show that you have all the key components in place, you’ll pique investors’ interest because they’ll know they’ll get a return on their investment sooner rather than later.
To show business readiness, you need to do your homework: your market research and business plan, for example. You need to show that you have a clear plan (for example, that you have already staked out a new location or supplier).
6. what it needs, where it will go and when it will be retrieved
Your investors won’t just hand you the cash you want and walk away. again, they’re in it for the comeback. so they will want to know exactly why you need the cash and exactly what you plan to do with it. they will also want to know when they can expect a return; that should be part of your business plan.
Investors will also be looking for an exit strategy and you need to think about that ahead of time. when they want to sell, will you buy them? can they sell elsewhere? if they don’t know they can take your money, they won’t want to put it in the first place.
7. a clear investment structure
Buying ownership of a business has legal ramifications, and investors will want to know that you’ve considered those issues. it should have a business structure that allows other parties to participate. You’ll also need to have a clear plan for how the investment will work. If the investors are partners or shareholders, will they have the right to vote in business decisions?
Part of this involves having a clear valuation of your business – a way to support your request for a certain amount of money in exchange for a certain amount of property. if you want $100,000 for a 10% stake, for example, you need to be able to prove that your business is really worth $1 million.
Part of this involves crafting a shareholders’ agreement (and perhaps a corporate constitution as well) that clearly sets out the rights of all owners. That should include the rights and obligations of owners, what happens if an owner wants to sell, what happens if there is a change in leadership, what happens if the business goes out of business, and other topics. Will investors get dividends or just the increase in the value of their shares over time? If you plan to distribute dividends, you need to have a plan for how much, how often, and what will happen if you can’t make a distribution.
Please note that this particular area is likely to involve some negotiation. Your investors may want a larger share for a lower price and may want adjustments or additions to the shareholders’ agreement. the trick is to come prepared, knowing that these issues are important and that you have already thought about them. this is one of those times when you really need to consult your lawyer – you don’t want to become a successful business only to find out you’ve lost control of your investors.
the end result
Investors are there to make money. Your task is to show them that you will do just that, and that you will do it better than their other investment opportunities. To make a successful launch, the most important thing you can do is be prepared. that business plan should be as airtight as possible. Your story should be compelling and well thought out. You need to know exactly what you are going to do with the money and exactly how the investment is going to be structured. show your potential investors that you are thinking about the future, because that is your main concern.