By: Kristy DeSmit | April 8, 2014
As a budding entrepreneur, financing is the fuel to your startup’s fire. Investments can be secured through angel investors, venture capitalist firms, crowdfunding, banks or by personal loan.
With such a plethora of options, why do many first time entrepreneurs have a hard time landing investments? Attaining capital is no easy task and requires a combination of passion, strategy, marketing and business planning.
Here are some of the qualities an investor looks for in a startup company that may determine whether or not they decide to invest:
1. Skilled Entrepreneur and Team
Are you trustworthy, hardworking, passionate, determined and focused on the success of your business?
The reality is, first impressions are everything. Getting an investor to like you is the very basis of securing their support. If you can’t sell yourself on the above traits, then you will have a hard time selling your business.
Just as important as making the investor like you, is making them like your team. Assemble a task force of complementary partners. A team of talented minds with different skills reassures investors that you are capable of handling all facets of your company. For instance, if you are the business strategist, it’s beneficial to have a marketing whiz and technology expert by your side. Well-balanced talent expands the possibilities further than, say, a one-man-show.
Do you have the credentials? Unfortunately, experience is very important to investors, which makes it tough for first time entrepreneurs to get their foot in the door. If you lack the years under your belt, highlight the skills you do have, such as education. More than anything, demonstrate you are capable of running a successful business — credentials or not.
Ultimately, charming an investor requires a certain business ethos (character appeal). Although there is no formula for how this is done, you can impress them by knowing your pitch inside and out, researching their investment portfolio for information to help you sell them on your idea, and appearing confident in your presentation — even if you are shaking on the inside.
2. Feasible Business Model
Is your business model achievable and do you have evidence of its workability?
When creating your business plan, it must explain how you plan to scale. You probably hear this term often. It means to grow your business in such a way that you increase revenue every year without increasing operating costs. To show that your business is scalable, you should have the proper means to scale (employees, marketing or equipment) or present an attainable plan for efficient scaling through a cost breakdown.
Marketing inevitably comes into question at this point and should be included in your business plan.
How do you currently reach consumers? Do you sell online or in retail locations? Address these strategies and your goals for future promotion.
Your startup’s business structure is the legal formation of your company. Carefully consider your options before forming an Partnership, S Corporation, C Corporation or LLC (Limited Liability Corporation). If you are seeking investment, most investors prefer a C Corporation because it allows for easy transfer of both Common and Preferred stock, whereas LLC has pass-through tax treatment — something investors don’t want. However, before making any decisions on your business structure, thoroughly evaluate each structure to determine which is best for you.
3. Large Market
Investors see beyond niche markets and into widespread marketability.
Is your company’s product or service marketable to the majority of the public or a very niche group of people? Is it likely to expand into other markets? Is there an opportunity for related products and services?
Many new entrepreneurs have a brilliant idea for a product, but lack the vision for a company or brand.
Does your brand have viral potential? For that sort of marketability, ensure your company is a deliberate entity capitalizing on not one, but a series of good ideas.
Know your market. What makes them tick? How will purchasing the product or service bring value to their lives?
4. Fair Valuation
How much is your company worth?
Spend time calculating a fair and confident asking price. The valuation will be determined through your physical assets, intellectual property, employees, sales, future projections and more. Find comparable examples of startups who received funding and establish your price accordingly.
Part of your valuation will include how you plan to spend the investor’s capital. This should seem like a no brainer, but you would be surprised how many entrepreneurs neglect to include the essentials in their planning. Let investors know specifically what their money will be used for, and when they should expect to see a return.
Vision is often the missing ingredient in modern startups. Goal setting convinces investors you are committed to your business’s success over the long term. Sharing your vision with them helps gain their trust so they can place faith in you to succeed.
During the course of your business career, there are bound to be mistakes or failures. Are you committed to your business even if you hit a few road bumps? Can you handle rejection and keep going?
You might be thinking organization is obvious, but why don’t more entrepreneurs use it to their advantage?
Adapt logical thinking in both your strategy and business plan. Investors will appreciate being able to follow your plan if it is sensibly laid out.
Organize your financial records. Your capital won’t be secured until the investor has done proper due diligence. If you are adamant about keeping proper records, an investor (or their team) will say a silent hallelujah, which not only increases their respect for you as a business owner, but also raises the odds of the deal coming to a close.
7. Similar Industry or Interest
An investor who has similar investments, personal interest, or expertise in your industry will be more likely to help you.
Though each investor is unique, try pursuing investors who would compliment your startup. Especially if you are imparting equity, an industry expert will not only provide funding, but also offer connections and invaluable mentorship as well. Stay within the investor’s “circle of competence”, as Warren Buffet would concur.
8. Safe at a Minimum
Entrepreneurs take risks, investors mitigate risks.
Generally, investors want low risk investments that will make them money. In the very least, you need to convince them they have a safety net, in which they will get their money back relatively easily. This can be illustrated in sales to date or other projections.
While a great deal of investors want security, some are open minded in their risk tolerance. Heck, some investors work intuitively. Whomever you are dealing with, you need to show them a viable exit strategy. A timeline, complete with milestones, will yield an approximate window from time of investment until time of return.
If you know someone who knows an investor in your niche, inquire about getting a face-to-face meeting with them. Word-of-mouth endorsements hold more weight than even the best company pitches. As your friend or colleague, the reference can vouch for your business and steer the investor’s opinion of you in a positive direction before you even get together.
Don’t let this stop you from preparing. You still have to impress them. Use your time wisely and make your reference proud. Don’t forget to thank them for their connection.
10. Low Competition
Does your business have insurmountable competition? If so, do you have a noticeably superior product or service?
Prove to investors why your business exceeds the competition, whether through quality, price, model or unique attribute.
Areas with low competition have advantages and disadvantages. While it’s clear you could dominate the market, it may be tough selling an idea that requires considerable consumer education. Moreover, it’s possible large manufacturers will even replicate a version of your invention if they see value in the idea or you pose a threat to their profitability.
Although no tried and true formula exists to win over investors, a business plan can help you map out your vision and give investors a professional nudge. It will also keep you in line with your company’s goals during periods of future growth and serve as reference tool should you need it.
Do you have any qualities to add to the list? Share your thoughts and experiences below!