What are potential investors looking for in start-up businesses?
Updated: 1st June 2016
Well-connected investors with money to bestow are the holy grail of small businesses with big ambitions.
To improve your chances of securing their interest, it’s useful to see the world through their eyes.
Investors are individuals with their own outlooks, values and motivations, but by following these basic practices, you’re more likely to find that perfect match.
It barely needs to be said that investors are looking for huge growth potential, the rate of which directly impacts the return on their investment.
Your core business model can be stripped back to the cost to acquire customers and the value of these customers over the length of their relationship with you. The more you can swing this ratio in your favour, the healthier your outlook.
Your organisation also needs momentum. Which way are things heading, and how quickly? It may seem that businesses are most in need of a cash injection when sales and growth are level - or even in decline - but an investor putting their hard-earned cash on the line is far more likely to want to jump on a business already heading for success.
Scalability is important, too. A strong idea spurring business growth can be hampered if you’re nearing your full potential. Prove that you can keep growing and growing and growing.
Your company’s potential can be shaped by the size of its market and the rate that it’s expanding. In addition, investors will want to know about the level of competition, and what sort of backing they’re working with. (All businesses have competition, even if it’s indirect.)
The best businesses solve a problem. Demonstrate there’s a demand for what you do and show what customers are willing to pay to meet it.
The management team
Gauging the suitability of the management team is less straightforward than the cold, hard maths of market size and growth potential.
For example, industry experience is useful, but then again, some of the world’s most successful innovations came from the minds of disruptive newcomers.
Your credibility as it relates to your ability to run a business is of greater importance. Proving you have invested your own money wisely so far will give a backer confidence you’ll have respect for theirs.
Media coverage, industry awards and associations with respected third parties all help prove your viability, too.
And then there’s the human aspect. Does your team gel? Does the investor feel like they would fit in? Improve your chances by being open and honest, including admitting shortcomings and questions you don’t yet know the answer to.
Not all factors affecting a potential investor’s decision will be within your control. A seasoned entrepreneur is likely to already have a portfolio of businesses that they’re looking to add to. It may be that you’re too similar to other businesses already in their stable - or maybe not similar enough to match their experience and expertise.
Other outside influences include legislation. Are you operating in any legal grey areas, or is there a chance new laws could scupper you? Similarly, technology evolves rapidly and systems and ideas become obsolete quickly, meaning any ideas based too much on one platform or gadget present a higher level of risk.
The paradox of appealing to investors is they profit by taking risks, yet the most enticing propositions are those with the least risk. Prove your business has a solid base, potential for growth and a minimal level of outside influences that could derail you and you should soon find yourself on the radar of investors.
If you’re running a small business in search for investment, talk to one of Begbies Traynor’s experienced advisors. We can help put your business in front of investors and ensure you sell your best possible self.
Martin has nearly 20 years’ corporate finance experience specialising in advising owner managed businesses. Martin has considerable experience advising on business sales as well as management buy-outs and acquisitions across a wide range of sectors and deal sizes.