I have had the pleasure in the past of participating in forums where start-ups presented to Angel Investors a few years ago. Since I am a massive fan of the Dragon’s Den, it 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 try to figure out why one company would hold interest for investors and another one would not. It is hard when you see how much the founder believes in the business and is passionate about what he/she is presenting. They then wonder why investors are not flocking to them. Since that time I have been asked my thoughts concerning investors and what they are looking for in an investment. I thought I would share this hoping it might help an entrepreneur seeking investment in tightening up 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.
10 Tips to Consider Before Looking for Investment
Before you present, keep in mind you must understand your product. If you cannot convey your product to the investor so that they are able to 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 market, the size of the market, your competition, and be able to articulate how much of that market you think is feasible for your company to address over the next 3-5 years.
It helps to 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 probably a stretch. If you look at Angel or Venture Capital sites, most list the industries that they focus.
Before you ask an investor to put their hard-earned money into your company, make sure that you have already invested yourself 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 your commitment or lack there of.
Many 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 of 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. If you are entering a market where someone has 60% of the market share today or are large corporations, it is going to be hard to convince someone that there will be any revenue made.
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 you a royalty payment depending on the investor and how they want to structure the deal. Revenue, assets, patents, or anything tangible is what will be used to evaluate your business in the early stages. How much of this that exists will be weighted as to the worth. If you are asking for $350,000 in investment and none of this exists, you will be giving up a majority of your company, if not all of it.
Make sure your financials make sense and if numbers are not your forte, then invest in getting an accountant to review this with you. It is true, in most cases, that a lot of this is speculative based on specific events, but you need to make sure based on a business plan that the numbers are as reliable as they can be.
Make sure you surround yourself with advisors and people that can help you get your business off the ground, as no one is an expert in every facet of a business. If you are an engineer, you most likely will need sales and marketing expertise. Maybe you are excellent at sales and marketing, but you do not have the background for 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 you might get interest from an initial presentation, but 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 the business plan you present is not full of holes. The worst thing is to actually have a viable business but not have a plan that represents it accurately and get turned down.
Of course, since the Dragon’s Den is on television and there is drama added to keep the interest of the viewer, but the investors sitting there and the comments given are what you can expect. How many times do you watch the show and see someone unprepared ask for a million dollars without any of their own investment , have a product without revenue, or the person not have the background or expertise? They are just looking for a Dragon to take their idea, the risk and invest their money? 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 also can help a business as well with contacts, marketing, distribution or other requirements – but the bottom line they are doing this to help increase their profits.
Before you ask someone to take a risk in you and your business, make sure you have all I’s dotted and the t’s crossed so that you find the right investor and the money you need to help your business take off.