One of the biggest challenges that entrepreneurs face in starting, running and growing their businesses is finding suitable funds. Raising finance for a business venture requires determination, courage, preparation and focus. It is not for the faint-hearted!
There is no shortage of businesses wanting investment – just a shortage of good businesses. Most proposals are rejected by investors after the initial review. Only a small number – fewer than 2% of the proposals get funding.
You must demonstrate to investors that investing in your business will give them a higher return than leaving their money in a bank account or investing in another business or shares.
You can increase the odds by knowing what investors are looking for and avoiding some of the pitfalls.
Investment criteria vary, but most investors will be looking for businesses that meet the following criteria:
Plans and ideas do not get funding, people do. Therefore, honesty and integrity are vital factors in persuading investors to let you manage their money.
The business world is full of people who are clever and conversant in current management concepts and fads. In short supply are people who are wise – people who are discerning, reflective and are less vulnerable to quick-fix remedies. Investors will back people who are focused, pragmatic and wise.
To attract investment, you need to invest your own money in your business. If you are not prepared to risk your own money, investors are unlikely to want to risk theirs. This should be new cash going in; the fact you have already invested thousands of dollars and hundreds of hours does not cut much ice with many investors.
As the rate of change continues to accelerate, yesterday’s winning strategy may become today’s losing strategy. You need to know every intimate detail about your market, customers and competitors. You will need to be market-focused, rather than product-focused.
Investors want to make sure that you can actually run the business successfully, rather than just write a business plan or talk about the business.
Investors look for entrepreneurs who are aware of the challenges they are facing and who do not seek to conceal them. On the contrary, they know what they are good at and they are looking for partners who can make up for their shortcomings and help them to overcome these challenges. This type of selfawareness and realism comes from years of experience and lessons learnt.
High salaries and perks for the directors and managers before the venture is profitable will send negative signals. Money should only be spent on the musthave things, not on the nice-to-have items. If the business is going to survive, the salaries should be paid by its customers, not by its investors.
The business opportunity must have a realistic chance of achieving a high return on capital – Internal Rate of Return of 40% per year is a good starting point. It may seem high, but it is commensurate with the risk – investors lose money on more than 45% of the deals and need to do very well on the ones which are successful to show an overall positive return.
You need to ensure that the financial forecasts are realistic and credible. Plucking numbers out of thin air will ensure that your proposal will be discarded by investors. For example, if your forecast shows sales increasing 100% per year, you had better have a convincing marketing strategy to back it up.
You must have detailed financial forecasts showing what could happen in the best possible case and worst-case if things do not go according to your plan (as they often do not).
The business must be scalable to a large size, either because it can capture a market lead in a small market or reasonable market share in a large market. Static, ‘lifestyle’ businesses (such as single restaurants or retail outlets) are of little interest to investors.
Having a trademark, copyright or patent can be attractive to investors, as long as it acts genuinely as a clear barrier to entry or secures a competitive advantage, rather than just being there for the sake of it.
The business must be investment-ready with a fully developed product or service.
You must address the critical risks and problems that the business may face. Investors will generally be aware of some of these risks, so failure to address them will undermine your credibility. Investors would rather back cautious optimists than reckless gamblers.
After putting their money in, most investors want to get it back within five years, either through a trade sale, sale to other shareholders, refinancing, or, rarely, flotation. You need to demonstrate a genuine intention and ability to provide such an exit.
When investors read business plans, they are looking for reasons to love the business, but they are also looking for reasons to discard it. As soon as they spot a red flag – regardless of how good the rest of your plan is – your chance of getting them to invest will evaporate fast.
The following are the most common reasons for rejection:
Investors need to believe and trust the people behind the business. Belief can be conveyed through the information provided in the business plan. Trust can only be established via meetings with investors. Thus the quality and credibility of the information in the business plan will help to open the door; the meeting will help to convince the investors that you can deliver the results.