Although many businesses come into being with only founder funds and/or the relatively small “seed” investments of family and friends (and then pull themselves up by the proverbial “bootstraps” until revenues are strong enough to fund the growth of the enterprise), most businesses will seek outside or non-family and friends investment at some point if they really want to “scale”. Unfortunately, when they get round to doing this, the vast majority of businesses are not as well prepared as they could be and do not think carefully enough about what investors are typically looking for in most cases when those possible investors hear that a company needs money. In other words, businesses need to fully appreciate the key criteria by which most investors agree to part with their cash and in this brief article we want to describe the eight major ones that are often most critical.
1. The Problem/Opportunity in the Market (the Pain and its size)
First and foremost, there must be a clear and tangible description of the problem or the “pain” felt by customers in the particular marketplace or the opportunity to be pursued and why the company thinks its approach or product/service can address it. In addition the size of the market must be big enough to make an investment viable, even if it is a particular niche. Both of these requirements sound straightforward but it’s often the case that a business is a solution looking for a problem or is perhaps an elegant offering chasing negligent pain and in a tiny market or one in which gaining a reasonable share of it will be difficult. If the business does not therefore present a compelling case in these areas, investors will often mentally “tune out” whatever else might be said subsequently.
2. The Produce/Service (How disruptive is it?)
Most businesses love to talk about their product or service, and need to be careful about not getting into far too much design detail in an investment presentation (so as not to bore an audience who will probably have far less interest). The key here is to be able to describe the offering in pithy or “elevator pitch” ways and to do so that it is perceived by investors to be potentially disruptive to the market. In other words, if a product/service is a “me too” or only a slight variation on other offerings already in the marketplace, an investor will not see how it can stand out or scale (unless you are by far the cheapest or most efficient solution by far – in which case say so!).
3. How money is credibly planned to be made (monetization)
Many companies seeking investment are remarkably vague about how their “business model” will work or how they intend to earn revenue or monetize the investment they are seeking. “This is a simple subscription model” or “We’ll make money on advertising” is not a clear enough statement to investor ears and a business should therefore spend more time talking about how the product or service will be priced, why, and how much this will generate year by year (and know how this will be done month by month too).
4. Past experience and track record of the founder (Relative competence)
Although some businesses put their best presenter in front of investors, most investors want to see the CEO founder or a co-founder putting the case for investment and in so doing, describing his or her background or track record as an effective manager and/or someone who has been an owner or entrepreneur before, even if they have failed! This should ideally include not only the founder’s past experience and expertise in the areas where this will be most telling but also offer a description of knowledge or skills in “creating the future” that he or she is describing. Even better, if a founder has raised money and paid it back to investors this can be very compelling.
5. Quality of the Management Team (Depth and Breadth)
It is not only the CEO or founders that matter to investors but everyone who is on the management team, either full or part time. In fact, the greater the investment ask, the more that investors may see this to be the most critical issue, as experienced and adept people with good functional breadth (in finance, sales, marketing and operations etc.) are likely to look after an investment and get a good return on it more than a couple of high-flying and charismatic founders.
6. Customers (Are they going to be repeat and varied ones)
We all know that customers are the lifeblood of any company, but businesses often forget that they will need a lot more of them after an investment has been made (in order to get a good return) and/or the existing ones will need to buy the products or services more frequently. Business owners should therefore talk about both existing customers and/or about the new ones they are seeking (and from what sectors they are likely to come) and why they will find the offerings attractive versus all of the alternatives that are likely to be available to them.
7. Financial and Pricing Model (break even and EBITDA)
It is estimated that as many as 50% of all presented investment decks contain little or no product or service pricing or financial projections. Even when they do, they are often a summary on one slide and follow the classical “J” curve which sees revenues climbing to 5 or 10 times the investment in a 5 year timeframe. Investors are generally weary of such statements and consequently want more detail and realism. Perhaps most important here is to tell investors when breakeven will be reached, based on the assumptions made, and what earnings before interest, taxes, depreciation and amortization (or EBITDA) are expected to be in each of the five years ahead. An accountant should prepare these figures and have all the detail available on hand immediately if it is requested.
8. Funding needed and timing (asking for the money)
While most businesses identify the specific amount of investment they are looking for (although some young business owners often forget to describe this at all!) they don’t always justify it or describe how the investment will be used to dramatically scale or get to greater revenues more quickly (and not just pay higher wages to the underpaid founders!). Business owners should therefore think about how much money they need on a “bottom-up” basis to grow the business, when that money is needed in timing terms and then be prepared to offer the detail when they are asked for it as they make their pitch.
Summary
The above list is not meant to be exhaustive but it is important to ensure that all eight of these (without exception) are covered in any presentation deck or other material that is going to be put in front of investors. If this is done intelligently and thoroughly, the business will be more likely to retain their initial interest and will have a much better chance of at least talking further with the possible investor, rather than to see the individual quickly move on to other investment opportunities which may better cover this ground.
