I have had the pleasure of participating in forums where start-ups presented to Angel Investors a few years ago. I am a massive fan of the Dragon's Den and found the experience was like a mini-version of the program but more upfront and personal.
Since one of our services is writing business plans and working with small business owners to introduce lenders and investors, participating in these events was a great exercise. I would listen to the owner's presentations and then figure out why one company would hold interest for investors and another would not. It is easy to see how much the founder believes in the business and is passionate about it as they are presenting. Unfortunately, not all cover the areas an investor needs to know to make an investment decision. They then wonder why investors are not flocking to them. Since then, I have been asked my thoughts concerning investors and what they are looking for in an investment. I wanted to share this to help an entrepreneur seeking investment in tightening their story/plan before approaching an investor.
These tips have been developed through my work with the financial community. Remember to keep in mind that approximately only 1 in 10 start-ups succeed and that investors are looking for that 1, not the other 9.
Tips to Consider Before Looking for Investment
Before presenting to an investor, remember to understand your product. If you cannot convey your product to the investor, so they see the value, you will lose their interest quickly.
You need to translate the engineer speak to market-speak and then market-speak into profitability speak.
Know your potential market, the size of the market, and the key competitors, and articulate how much of that market you think is feasible for your company to address over the next 3-5 years.
Look for investors that understand your market and industry. Asking someone focused on retail to invest in a bio-med or cloud computing product is a stretch. If you look at Angel or Venture Capital sites, most list the industries they focus on.
Before asking an investor to put their hard-earned money into your company, ensure you have already invested in labour and funds. Before asking someone from the outside, you should exhaust the friends and family route. If you don't have any skin in the game, this is a sign of a lack of commitment to your business.
Many entrepreneurs are confused as to why investors do not typically invest in "ideas" that are not products. Ask yourself if this was your money – would you? You need to have a product or service already created. If you do not have any revenue, you need to have prospects and partnerships underway or possibly have a beta program in place. You may be passionate about your product, but the investor has all the risk. An investor or investment firm is a business and a way of generating a return for themselves or their firm, not to lose money on poor investments.
The more unique or patentable your idea, the better it is. If you have a "me too" product, you need to make sure you can prove that you have a unique value proposition from your competition. Suppose you are entering a market where someone has 60% of the market share today, or your competitors are large established corporations. In that case, it will take much work to convince someone that there is potential to generate adequate long-term revenue.
If you are looking for an investor versus a loan from a financial institution, you need to make sure that you are prepared to give up a portion of your company or pay royalty payments. It will be up to the investor and how they want to structure the deal. Investors will use assets, patents, or anything tangible to evaluate your business in the early stages. This will then be weighted as to the worth. If you ask for $350,000 in investment and none of this exists, you will be giving up most of your company, if not all of it.
It is true, in most cases, that a lot of this is speculative based on specific events. Still, it would be best if you made sure, based on a business plan, that the numbers are as reliable as they can be. Make sure your financials make sense. If you need more clarification on the numbers, invest in getting an accountant to review them.
Make sure you surround yourself with advisors who can help you get your business off the ground, as no one is an expert in every facet of a business. You most likely will need sales and marketing expertise if you are an engineer. Maybe you are excellent at sales and marketing but do not have a background in operations or finance – find the help you need. Investors will look at you and "your team" to determine your track record and expertise.
All of the above needs to be addressed in a solid business plan, as the investor might show interest from an initial presentation. Still, eventually, you will have to provide the detail behind your plan. Just as with a financial institution, you don't get 100 chances; you need to make sure your business plan is not full of holes. The worst thing is a viable business without a business plan that accurately represents it and then to get turned down for financing or investment.
Summary
Suppose you watch the show and see someone unprepared ask for a million dollars without any of their investment or have a product without revenue, or the person doesn't have the background or expertise in the business. In that case, the entrepreneur is just looking for a Dragon to take their idea, implement it, take all the risk, and invest their money. You will not see this individual get a deal for an idea. Of course, since the Dragon's Den is on television, drama is added to keep the viewer's interest, but the investor's questions and comments are what you can expect.
Private equity is a business, and any Angel or Venture Capitalist is not investing in your business out of the kindness of their heart. They are looking to make a profit. For the investment, they can also help a business with contacts, marketing, distribution or other requirements – but the bottom line is that they are doing this to help increase their profits.
Before you ask someone to take a risk on you and your business, make sure you have done due diligence and done your part to ensure the business is worth investing in before approaching others.