Innovative ideas need capital in order to grow - a scenario that plagues most startups worldwide.
Having a breakthrough idea, however, does not necessarily mean that entrepreneurs are well-versed with the ins and outs of acquiring funding. The following 'open letter' hopefully will give small businesses a basic concept of what potential investors are looking for in a deal.
A letter to entrepreneurs from a potential investor
Dear Entrepreneur,
So you have a great business idea and need money to grow it into an empire? That's great because after all, entrepreneurs and their small businesses are what keep the economy humming. As an investor, I have been approached by many entrepreneurs looking to raise money for their ideas. I have seen the good, the bad and the ugly.
It can be just as frustrating for investors as it is for entrepreneurs to go through this process. So here are some pieces of advice to help smooth out the process for both of us:
1) Passion for you, money for me:
Obviously, we both should believe in your business and its potential, but the deal would involve more than just that. Our relationship will revolve around passion, opportunity and risk.
You must have that intense passion for your business. You will need it to get through all the obstacles you will face while running your business. I will be looking for this passion in you.
I also want to see your commitment to the business. You need to have "skin in the game" and stand to lose if I lose as you have to share the risk (more on that below).
Don't expect me to be as passionate about your business as you are. I might get excited about it, but don't be disappointed if I don't fall in love with it as much as you.
My priority as an investor is to get the best returns for the money I invest and to control the risk of losing that money.
So before you approach me, put yourself in my shoes and answer this question: "What's in it for the investor?"
If you can't answer that question, you probably are not ready to approach me yet.
2) Know your stuff:
I have to believe in you to invest in the business. The first prerequisite is for you to know what you're getting yourself into.
This means:
• Understanding the industry, market and competition
• Having a logical action plan to deliver your product
• Having reasonable projections, backed by facts and logical assumptions
• Showing me results: It's much better if you show me facts to support your claims. The more good results you have, the more likely I am to invest, and the more likely you will get a better valuation for your business
• Knowing your numbers! For starters, know what your sales, profit (gross and net), growth rate, customer acquisition cost, and other important figures. You should know these like you know your age (i.e. don't read off a paper or say "I have to check with my accountant")
• Knowing if there's a room for improvement in your company by showing me you know your sore spots and how you will fix them
• Understanding your assumptions and being prepared to be challenged on them
• Being clear on what you want (how much money you need and what you are willing to give)
• Knowing what stage your company is in (idea, early start-up, start-up, growth, expansion or maturity)
If I love the idea, but have worries about you I will want to take a controlling position in the business (see point #1 about controlling risk).
3) Do your homework
Make sure you find the right funding for your situation as there are different financing options for various stages. A venture capital firm will look for companies with a track record of growth that need to break into the next level. An angel investor will be more open to a company in the earlier stages. An incubator will take you in at the idea stage. Here is a guide to help you find your match.
Check my background (which industries I have worked in, my connections, speeches I made, etc). Also check my previous investments (size, industry and the likes) to get an indication of what I prefer to invest in. I should be able to open doors for you (e.g. connect you to a key client or supplier).
4) Come prepared
I will be looking for three things when we start courting each other:
• The Idea: I will evaluate the potential of the business, your business model and the industry. I will look for supporting evidence to show me this can succeed.
• The People: I will be evaluating you as an entrepreneur and your team. I will look for deficiencies in you and your team. I will judge how well I will be able to work with you. There are a lot of great ideas out there. My investment will be mainly a vote of confidence that you and your team can get things done.
• The Fit: I will look at how well your business fits with me. I will look at the potential, the size of investment, the expected ROI, and how much time it will require from me to hold your hand (if needed).
Oh, one more thing. Be transparent with any issues you have (debts, legal issues, etc). They will come up eventually and it's better I know about them sooner than later.
Good luck.
Regards,
Investor X
P.S. If you know entrepreneurs who can benefit from this advice, then please go ahead and share it with them.
Noor Shawwa writes at ThinkDoBusiness.com about business topics for technical entrepreneurs and first time managers.
© Zawya 2013
