It is advised that your business plan should sell itself before the sale actually happens. The same case applies to sourcing for investors; you should know what they want and convince them you can deliver. How do you get inside the mind of a potential investor? The truth is that you can’t. However, there are a few common things that most investors want to know before sending that wire or handing over that check. We’ve discussed them below.
Whether it’s the business’ actual current financial performance or potential financial performance, investors want to know about it. So before you start looking for investors, make sure you know your business’ financial numbers and/or what your business’ potential numbers could realistically be (usually with the help of a pro forma).
This means preparing to answer questions about your business’ financial state or its potential. These questions could be about financial stability. The time before returns are projected to start materializing (with longer wait times often occurring with real estate investments), debt financing, and potential buy-out options. Some investors, especially those particularly experienced, will dig further into your financials. Of course, what investors will want information on will depend on the stage of the business (i.e., startup versus new joint venture versus established business).
Investors, for the large part, are looking for experience in the management of potential investments. This is so important that it’s actually required by securities laws as a disclosure item. Specifically, investors look for successful prior performance in the business’ industry.
Though securities laws require you to disclose certain background information to investors, should also expect them to do a little digging into your background on their own. Some investors will even hire someone to do it for them. Some investors may also look for particular qualities in the management of an investment. Altogether, prior experience and results matter.
Investors look at ideas that stand out. Ideally, something about the business needs to be unique to show investors that it has market potential. How does it stand up to its competitors? What gives the business its competitive advantage, and what is going to attract potential customers and clients? How will it compete with better financed and more established businesses? Something would have to stand out as unique.
Proprietary features and competitive advantages also influence investor’s decisions. In other words, the features of a business that make it stand out from its competition and attract clients and customers. An investor may look for advantages that include intellectual property protection, exclusive licenses, and exclusive marketing and distribution relationships.
The business model is a business’s main selling point to investors. Especially if the business has just started operations or is still in the idea phase. If the business is already generating revenues, the business model shows where profits are coming from.
There are many different types of business plans. And each investor is different when it comes to what they look for in a business plan. Suppose the pitch is to one or more large institutional investors. In that case, the smart thing to do is to customize the business plan presented to each institutional investor. That way the business plan reflects the particular attributes each institutional investor is specifically interested in. However, this is not financially smart if the investors are smaller and you are seeking funds from multiple investors. In these situations, it’s best to include in the business plan the common things that most investors will want to know about. For example, the financial performance, what makes the business unique, market characteristics, etc.
Another important element that investors will look at is the size of the market in which the business will be participating. The idea to them is that the larger the market, the larger the potential return capacity. Other investors will look at overall market characteristics, such as income, growth, and competition, with the idea that the existence of certain characteristics equals greater return potential.
Overall, the larger and more stable the potential client or customer base is, the better the business will look to the investors. If the potential client or customer base is small, it could signal to investors that there is a limited chance for growth.
While we can’t read the minds of your potential investors, we can assist you with the legal documentation and advice needed to raise capital from those investors. At Dodson Legal Group, we have business and investment attorneys here to answer your questions and assist you in capitalizing your business. If you’re in need of such counsel, please call us at 844-4DODSON for a consultation.