Entrepreneurs claim that finance is one of the top three ingredients required for a successful business. So they have to find out ways of raising funds for their companies. Entrepreneurs have various avenues to raise funds for their businesses and one of the ways is through investments by Angel Investors i.e. High Net Worth Individuals providing capital in exchange for ownership equity or convertible debt.
As an entrepreneur, investing can be an important part of growing and diversifying your business portfolio. It’s also important to understand what investors look for when considering whether to invest in a business. Investors that are aware of the key distinctions between value investing vs growth investing. Investors also looking for companies with a strong management team, a clear and compelling business plan, a large market opportunity, and a competitive advantage. By focusing on these factors, entrepreneurs can increase their chances of attracting investment from the right investors.
Here are five things investors consider before investing in a business.
1. Passionate Founder
You might have heard that investors invest in people, not businesses. Investors prefer to give their funds to founders that are passionate about their business and it is usually obvious when you speak with the founder. Apart from the passion from the founder, investors also want to know if the founder has skin in the game. What has the founder personally invested in the business? How far has he gone to raise funds? What is his attitude to problems and how have the problems been resolved? Is there a sense of ownership?
Passion is an important ingredient for the success of a business and any business without a passionate founder lacks longevity, clarity, and perseverance. It is doomed to fail.
2. Competent and Experienced Management Team
No investor will feel safe giving money to a management team that consists of incompetent and inexperienced people. Apart from the founder, an investor would like to know if each function in the company is manned by efficient and experienced staff.
Investors will also like to know if these functional heads have the requisite operational controls. They should be empowered to carry out their duties even when the founder is not available.
3. Competitive Advantage
To compete favourably in the marketplace, a founder should be able to explain to an investor why he thinks his product or service is better than the incumbents in that business. There must be a differentiating factor or feature which would cause customers to prefer his product over his competitors. What makes his product unique?
There are three strategies for establishing a competitive advantage: Cost Leadership, Differentiation, and Focus (Cost-focus and Differentiation-focus). A founder should decisively choose which strategy he/she intends to use to establish that competitive advantage.
When established successfully and clearly communicated, the competitive advantage can lead to more profits and increased brand recognition.
4. Market Size/Scalability
Every founder should know the market size for his business as this is critical when analysing and forecasting revenue. Market sizing tells the company and investors how much potential business is really out there. It also helps to estimate the staff strength and the approach to recruitment. The market size analysis should tell whether the business is suitable for a mom and pop shop or a global business
Another closely linked factor is scalability. This describes a company’s ability to grow without being hampered by its structure or available resources when faced with increased production. The investor wants to know if the business is scalable as this shows that there is potential for growth and more revenue.
5. Financials/Valuation
Before a founder asks for funds from an investor, he must have an idea of what his company is valued. Now valuation is an art and science. The investor would clearly want to know the valuation method that was used to arrive at the value of the company. The valuation should be done by professionals. Now he may or may not agree with the valuation. He would want to test if the founder inflated the value of the company.
The founder should have also drawn up his financials – projected Profit and Loss, Projected Balance Sheet, Cashflow and more. He must also understand the financials so he can provide accurate information and assumptions when asked. Every investor is very keen to know what the return on his investment and how long it will take to achieve his desired financial goals.
Summary
Making a pitch for investments from an investor is a thorough exercise and every founder should be prepared.