Think Like a Funder to Attract Business Investment
Your excitement and confidence in your small business are important for success, but would-be investors also need hard data before they put their money behind you. By evaluating your enterprise with an objective eye for return on investment (ROI), you can make your business more attractive to a range of potential funders. It may take time, and even a bit of luck, to find the right match, but you can tip the odds in your favor by understanding the range of options available, and creating a pitch that speaks directly to investor interests.
Who has the money?
There are a broad range of funders available to startups, sometimes depending on the sector you work in and how far along you are. Here are some of the most common.
- Personal investors (family and friends) are often the first source of funding for early startups. Still, no matter how close the relationship, loans must be well documented in writing so all parties understand the terms and risk. Laws created during the Great Depression protect personal investors from being scammed by unethical small business owners by allowing only “accredited investors” with a certain level of annual income or net worth to invest. “There’s an exemption from strict security law that is allowed because friends and family investment does happen — but there are strict limits on the number of unaccredited investors allowed,” according to Legal Zoom. You can accept money from grandma, but your funding should not rely solely on a network of relatives.
- Angel Investors are accustomed to taking a risk on smaller operations and are often serial entrepreneurs themselves who can also offer advice and connections. They often attend live and online pitch events or can be found via other founders. Angel Groups are also more common today and bring individual angel investors together to make larger investments and spread their risk.
- Accelerators and Incubators often provide seed money to help founders develop their idea in exchange for a percentage of the future business. They typically provide a degree of mentoring to help fledging business owners gain knowledge and traction and may provide opportunities to pitch to other funding sources during their demo days.
- Venture Capitalists (firms and individuals) typically make large-scale investments with more established companies pursuing Series A, B and C fundraising rounds. Receiving VC interest is exciting, but verify that those expressing interest are a good match for your business, offer favorable terms and have a reputation for treating founders well.
- Banks and government programs are not investors, per se, but can sometimes provide capital for founders based on your personal track record with a specific lender and overall credit score. Banks can also help you secure a business credit card and, potentially, a line of credit.
Government programs, especially those geared to underrepresented founders, will sometimes provide funding even when others are unwilling. Such programs, however, often require that you meet extensive qualifications and keep detailed records or meet reporting requirements that can be burdensome for a small business.
Think one step ahead
Once you’ve identified potential funding sources to pursue, channel your toughest critic and evaluate your business like an objective third party. Investors do not want surprises, or to feel that you’ve hidden or misrepresented any information. Be prepared to proactively raise and address areas of your business that need improvement and how you are addressing them. You are not ready to seek investment if you cannot defend the current state of your business with hard facts and reasonable projections for the future.
Learn to tell your story
The art of the pitch is critical to seeking funding, even if the person you’re pitching is your favorite aunt. No one parts with their money until they understand the problem you’re working to solve, can get excited about your distinctive approach to remedying it, and gain confidence you are the right person with the right product or service to do so. For help developing an effective business story, check out Pitch University from Monica Motivates, LLC.
Create an investor-targeted plan
Ultimately, investors want hard numbers before investing hard cash. You must know critical metrics that reflect the health of your business. Focus on:
Estimated size of the potential market for your product or service. How many people, businesses, or long-haired dogs need your product or service? Are there unmet needs in the marketplace? How difficult will it be to get potential customers to see your business as an answer to their problem? Do they even feel that they have a problem to solve?
Your track record in founding and running a prior business. Or, if this is your first, point to early successes in this business, such as key customers or contracts, customer satisfaction levels or growing orders.
Marginal revenue. Investors want to see a scalable business where growth and net revenue will outpace the need for additional resources and increased costs.
Detailed plans for using capital efficiently. Every investor wants to know her money will be used wisely to grow the business and provide a sound return. Explain precisely where investment dollars will be spent, how they will change the business, how they will help you grow sales and profit, and how the investor will profit.
Acknowledge threats and share plans for addressing them. What elements within your business or external to it could significantly impede your ability to grow or even to remain profitable at your current size? Are new competitors popping up? Are the costs of raw materials rising? Identifying current and potential threats and sharing your plans to deal with them gives investors confidence you (and they) won’t be blindsided.
Every business will be stronger on some of these attributes than others, but building a solid case with as many elements as possible will increase your odds of securing external investment well matched to your business and goals.