When looking for additional capital from outside investors, position your business to meet their needs.
The more you can provide what they’re looking for, the better your chance of success. Remember that different types of investors usually have different goals.
Important points to consider when you’re thinking about getting investors or lenders on board:
A clear strategy is critical
Obtaining outside funding begins with a solid business plan. If you write a convincing business plan based on solid research, your chances of securing funding increase significantly. Your plan should have two primary focuses: fulfilling what the market wants and projecting your profitability.
It’s essential to have a clear strategic plan outlining where you see your business in five years. Investors want to see your long-term thoughts, even if they are only educated guesses. A strategic plan is a test of your vision and your ability to plan. It should include:
- Where you are now and how you got there.
- Market size (local and international): Specify statistics and other hard facts to support your claim that your business can capture a viable share of the market.
- All existing and potential competition: Focus on why you’re different and what makes you better than the competition.
- The intellectual property you own, which may be the most valuable asset you have: Make sure it’s yours and that your employees don’t think they own it. Cover any brands, patents, trademarks or existing copyright you may own.
- Potential of future products/services: Outline how you might develop your product or service going forward. Make sure you have something else on the drawing board to show continuity and that your business has more opportunity in the future.
A solid financial argument for the investment
While a bank and an investor will have different expectations when they review your financial projections, they both want to see steady growth and profitability in a short period. The more tangible those projections are the more likely you are to get funding.
The following factors will improve your chances of getting funding:
- Your plan should target a specific market that is large enough to produce a profit and sustain growth. Investors prefer markets with the potential for high growth.
- Your plan should show good profit potential in less than one year.
- The higher the return on their investment (ROI), the more likely you are to attract outside investors.
- You need to show that you have invested your funds into the new business. If you do not have enough faith in the proposed enterprise to invest your own money, why should anyone else invest in it? New entrepreneurs often overestimate the value of their "sweat equity."
- Above all else, the projections must be realistic.
Investors like to know that their money is being put to work to increase profits, not to pay off debt. Similarly, they’re not going to be keen on investing in a business that doesn’t have proper accounting processes in place.
To make your financials look better, you should consider:
- Reduce or restructure your debt. Use any spare cash flow to limit your exposure to debt, and consider transferring higher costs such as overdrafts to a term loan.
- Eliminate unnecessary fixed costs. Investors will like that you run an efficient business which can operate on a lean budget.
- Use accounting software for up-to-date records. Talk to your accountant about how to effectively present your financial systems to their best advantage.
- Check your industry standards for inventory levels to ensure you aren’t overstocked.
- Review your financial ratios, such as gross profit to sales and debt to equity. Ideally, these should improve but, at a minimum, they should be stable.
A great management team
Even if your financials look great, the product or service seems revolutionary and the industry is the next best thing to a gold mine, it won’t matter if you don’t have a great management team to implement the business. Investors want to see an organized and committed team that enjoys what they do. If a key role is currently unfulfilled, explain how you will complete the hiring process once funding is raised.
The second challenge is that managing a business with 10 employees is different from 100 employees (if your growth plans work). Cover the restructuring of management to cope with growth in your proposal and show how you will deal with this challenge and your own evolving role in the company.
Have a clear exit strategy
It may seem counterintuitive, but developing an exit strategy before you’ve even secured funding lets your potential investors know you are thinking about the end goal. The most common exit strategies include:
- A corporate buy-out: A large corporation likes your business and thinks it will fit in well with theirs.
- A management buy-out: You and/or key staff buy out the investors.
- A management buy-in: Another syndicate buys into your business and manages it.
- An Initial Public Offering (IPO): You list your company on a stock exchange so that investors can sell their shares.
Plan for your presentation
Convincing investors or lenders to invest in your new business can be a daunting task. The following are tips to assist you in your search for an investor or lender:
- Target the right people. If you’re looking for an Angel Investor, for example, don’t send out a mass mailing to Angel Investors. Many of these investors only invest in specific industries or geographic regions. If your plan appears to be a mass mailing, it probably won’t even be read. Be patient and only approach a few at a time.
- Make connections. Most Angel Investors like to receive investment proposals from trusted sources such as lawyers, accountants, investment advisors, or economic development personnel. To get introduced to angel investors, talk to the professionals who have assisted you in putting together your business plan.
- Use family and friends as investors. When approaching family and friends about investing in your new business venture, don’t directly ask them to invest in your business. Instead, ask if they know anyone who might be interested in investing in your new company. If they are interested in investing, they will quickly let you know. If they are not interested, they will frequently say that they will think about who would be interested. This makes the request significantly less awkward if they are not interested.
- Create a clear and concise tag line or elevator pitch. You need to be able to describe your business in one or two sentences that will intrigue the listener.
- Create a one-page summary of your business plan. Create a one-page pitch that summarizes your business idea. When reviewing your proposal, angel Investors are significantly more likely to read this one-page plan than they are a 25-page business plan.
- Make your sales pitch. If the investor is interested after reading your one-page summary, you will be invited to pitch your proposal. This is generally done with a PowerPoint presentation that summarizes the Business Plan you have prepared. Have the full business plan available to give them at the completion of your pitch.
- Be coachable. Investors look for chemistry and coachability when selecting partners to invest in. You do not have to take all of their advice, but you should listen carefully and not be defensive if they provide critical advice.
- Be patient. This process will take way longer than you expect. Investors will have multiple requests for additional documents over an extended period of time. Entrepreneurs need to be committed, passionate, and thick-skinned. This is a time-consuming and ego-challenging process.
Summary
The key to attracting investors is to present your business in the best possible light while remaining realistic. Investors won’t be interesting in financing a business that’s in trouble, so they’re not a good option if your main goal is to solve financial difficulties. Investors are interested in businesses that will pay off for them down the line, so your main priority is showing them how your business will achieve that. Lean into one of our Relationship Banking Officers as a sounding board as you continue to research this topic.
