- December 5, 2021
- Posted by: kshady
- Categories: Business plans, Startup
You’ve put your heart and soul into your business, and now it’s time to decide how to attract investors and secure funding to continue growing. But how would you do if investors – such as venture capitalists, angel investors, and bankers – were to evaluate your company? What components will drive their decision to invest or not? When you know what to expect, pitching your idea to investors can be less intimidating and more like, “Let’s see if we fit in.” The process of obtaining financing to start your own business may put you on edge a bit – not because you don’t know your company inside and out, but because you’re not sure what to ask of you when you meet potential investors.
Develop a solid business plan
Your business plan is a critical document that proves one thing to investors: that your business is worth the risk. Your plan should clearly define your business goals and objectives and demonstrate your team’s experience in your field. Demonstrate that you have a deep understanding of your customers (target market) and provide a full description of the product or services you offer.
An essential part of a business plan is your marketing plan. It determines the market size and growth prospects and should show trend effects and sales potential. This is where pricing, promotion and distribution strategies come into play. Also talk about barriers to entry, and address how you plan to keep competitors at bay. Finally, make things digestible for everyone by presenting your business plan in an attractive format. This not only makes you stand out, but your audience may also thank you for it.
It is worth noting that investors who are already familiar with your industry and market may be more likely to invest in your company due to their experience and convenience. Note that knowing them may also mean more targeted questions for you, so be prepared to share your experience.
Developing a forecast model
A business model that is transparent, repeatable, scalable and as detailed as possible is essential. Show investors that you not only anticipate growth, but plan for it as well. Be prepared to demonstrate how your business model will help your company become more profitable. Focus on financial and market related issues; these are vital areas for investors.
A reasonable forecast model is a tool for investors to determine how well you know your market and your supposed success in relation to your market. Your model should be realistic but also show enough revenue and growth to keep investors interested. Just be prepared to explain how you will achieve your numbers. Consider making conservative and bold predictions to show alternative assumptions – from the most cautious to the most optimistic. Remember that forecasting is an ongoing process that requires constant re-evaluation. The more current your expectations are, the better prepared you will be to make informed strategic decisions for your business.
Get Customer References
Investors like to speak directly with customers who have first-hand experience with your product or services. Conversation with a customer brings a unique perspective on your company that cannot be gained simply by meeting with you, reading your marketing materials or your company’s website.
Investors look to understand the value your business brings to customers, the process your customers went through when making a purchase decision, what your customers’ user experience is, and what sets you apart from competitors. Have clients ready to give interviews to potential investors when the time is right.
Intellectual property is today more important to businesses than ever before, especially for technology startups and industrial companies whose knowledge serves as a sustainable and defensible differentiating factor for the company. The three types of intellectual property are patents, trademarks, and copyrights. Investors want to see that you know what intellectual property your company needs to protect and how to protect it.
According to the Startup Genome Project, intellectual property has been identified as a critical component for startups around the world to gain a competitive advantage in the marketplace.
Be prepared to explain the capitalization
all equity ownership, debt, and liquidation ratings for various investors or lenders investing in the business. For investors, a ceiling table is valuable because it accurately reveals how much a company’s founders may own.
Investors want to ensure that their interests align with the founders, and there are enough shares left to attract investors in subsequent rounds. Be warned that “founder dilution” can raise a red flag – money given to founders can come with onerous terms.
Explain your financial
statements Your company’s financial statements tell a lot about how you run your business. In particular, investors are interested in your cash flow, debt obligations, and equity. Having money in the bank proves that you are ready for unexpected problems and that you can take advantage of new opportunities.
Good cash flow (and providing a strong cash flow forecast) is a sign of sustainable operations that comfort investors; They trust that you can stay out of the “red”. Alternately, debt obligations translate to cash that is gobbled up in debt payments. Slow months may mean that you are unable to meet salaries and other expenses. What about fairness? Investors are interested in buying stock in your business, so they will use your financial data to calculate the value of your company to shareholders.
Justifying the use of proceeds (use of funds)
Investors want to know exactly how your company plans to use its proceeds. Will you allocate their money for capital expenditures? research and development? Legal and accounting fees? What about recruitment costs and salaries? Establishing capital efficiency early in the process can help your company develop insightful leadership and ultimately make you more attractive to investors. Be prepared to explain to investors what milestones you aim to achieve and what results to expect.
Investors who analyze your company’s investment potential will examine your financial performance from every angle. Let them know how you intend to grow your business quickly using the least amount of their invested money. Spending wisely should be your goal no matter the economic conditions, so put a track record of proper money management.
Explanation of total target market and market entry strategy
Total Targetable Market, or TAM, informs investors of the potential size of your market. How many clients can be reached? How long does it take to become a market leader? Understanding the size of the market not only helps guide your business but also helps in determining the strategy for entering the market. Understanding your TAM will help you make predictions about the true size of your market, the number of potential customers you can anticipate, how long your sales pipeline will be satisfied, and potential revenue in a specific time frame.
Investors want to know how you plan to use your resources to reach customers and provide value to them to gain a competitive advantage. Liquidity is key – as the market, industry, and business change, so should your strategy. Keep in mind that investors want companies that can grow quickly and manage that growth. You should be able to explain your TAM to investors and discuss your strategy for making it happen.
Introducing a strong sales line
There is no business without sales. Investors must be convinced that people are willing to buy your product or services. Your product or service should stand out from what is already being offered in the market. Your differentiators should be easily identifiable when explaining the selling process to investors.
Perhaps your competitive advantage lies in your intellectual property, or perhaps you are solving a problem in a new way. Be prepared to prove to investors, using tangible evidence, that your market potential is large enough to warrant investment. Provide a record of the sales you’ve already made (breaking down the number of potential customers at each stage of the buying process) and show how you plan to continue expanding your pipeline to grow the business and make money.
Conducting Legal Due Diligence
Investors interested in investing in your company will undoubtedly have an attorney who will conduct a full legal review. The legal due diligence process, while stressful, is the final examination of all legal aspects of your business and team. Investors not only gain a deeper insight into your company and operations before making a purchase, but also use the information collected to help them determine the purchase price.
t is wise for their legal team and yours to establish a good relationship for the process to run as smoothly as possible. For more information on legal due diligence and proper planning, take a look at the article: What Every Business Owner Needs to Know About Legal Liability.
Provide Management Team Resumes and References
Investors care deeply about you (as CEO) and the management team – from understanding their industry background to business experience. They should feel confident that you and your team can lead the company to growth and a return on their investment. As the “Best Banana”, your expertise is of great interest to investors. They want to know that you have a proven track record of superior performance, experience, and leadership in your previous industry or project. Be sure to display confidence and passion and demonstrate your willingness and ability to change course if your company needs a change of direction.
Other positive traits that investors look for in CEOs are the ability to make decisions with input from your leadership team (there is no room for hesitation), excellent relationship and communication skills, and the ability to build and implement a company around core competencies.
Investors bear risk the more they invest. The opportunity to exit provides them with a “reward” for their risky move. It is therefore essential to incorporate an exit strategy into your business plan. Let investors know how you plan to reinvest them (and then some!). Will you follow through with the acquisition? Merger with another company? Choose an exit strategy that aligns with your business and personal goals. Your time frame may vary, so think about when you might want to implement your exit strategy as well. The goal is for all parties to exit profitably.
Once your meeting is over, tell us how you did! We are experienced in helping entrepreneurs like you lay the solid financial foundations that investors look for when selecting businesses for financing. As exhilarating as it is, the fundraising process can be intimidating. But when you’re ready, you can move forward with strength and confidence – bringing you one step closer to achieving your goal. Do you need help organizing your finances? Learn more about our financial manager and bookkeeping services or schedule a consultation.