Pitching to investors can be intimidating. But entrepreneurs can make this daunting task a bit easier by putting themselves in the investors’ shoes and thinking about what they themselves would look for when evaluating a business.
Every investor — be it an angel investor, a venture capitalist or a banker — has a different mindset as well as a particular set of criteria for evaluating a business. While some may base their decisions purely on numbers, others might be emotional and may factor in their gut feeling into the equation while making an investment decision. Then, there may be those who like taking risks as opposed to investors who are risk-averse and prefer to play safe.
Here are the five things that most investors want to know before agreeing to give their money to an entrepreneur:
1. Financial performance
– Potential investors, in particular banks, expect entrepreneurs to know their numbers and have the capability to demonstrate that their business has robust financial performance.
VCs will typically look for a stable business opportunity, the potential for a high rate of return on their investment and a logical exit strategy.
Other financials that investors look at are signs of growth, plans for borrowing money from other sources or issuing shares to stimulate growth, debt repayment plan and proof that the company is capable of taking care of its financial obligations.
2. Background and industry experience
– Investors prefer to invest with experienced entrepreneurs that have a solid track record of high performance and leadership in their industry or in previous ventures, if any.
Most investors will do their due diligence by researching an entrepreneur’s business experience and background in the industry. Commitment and passion also tend to inspire confidence in investors and stakeholders.
Some investors, particularly angel investors, give a lot of importance to the chemistry between the entrepreneur and themselves. This is because they prefer to take a more hands-on approach in the companies they put money in.
3. Functional business model
– A business is expected to start showing its strategic value as soon as it begins to generate profits. Investors want to see the current business model that is being used and how it will help the organization become more profitable.
Additionally, different investors look for different types of attributes from a business plan. Hence, it is crucial to customize a business plan based on the investor. For instance, angel investors and VC fund managers pay attention to both market and financial issues, so these are the areas that an entrepreneur needs to focus on when approaching these types of investors.
4. Business uniqueness
– Investors prefer to invest in products or services that are unique and want concrete evidence that their market potential is large enough to make their investments worthwhile.
Investors are guided by product characteristics such as proprietary attributes and competitive advantage. Some features they pay attention to are intellectual property protection (such as patents and trademarks), exclusive licenses and special marketing and distribution relationships.
5. Market size
– Angel investors prefer to invest in products or services that address significant problems for significantly large target markets. Whereas, VCs tend to look at market characteristics including limited competition and significant growth when investing.
That said, when pitching to investors, a larger and more stable customer base will give entrepreneurs a competitive advantage. This serves as proof that a firm has a great impact on its target market.
Investors want to invest in businesses that can grow quickly and sustain this growth. They need to see that the startups they are investing in can generate significant returns, beyond the initial product idea with sufficient financial projections and a plan to include several sources of revenue.
The bottom line
Investors are looking to make money. An entrepreneur’s job is to show them that they can do that — and that this will be the best investment they will ever make. The most important thing a startup owner can do to make a successful pitch is to be prepared. Next comes a business plan, which should be as watertight as possible.
A compelling and well-conceived brand story goes a long way. The entrepreneur raising money should know exactly what they plan to do with the capital and exactly how the investment will be structured. They need to show potential investors what lies ahead, for them and the business.
