Over the past few months, I've seen some of you looking at scaling your businesses to levels where it is no longer viable to go it alone as there is not enough money available, and so you're beginning to look for investors. One young entrepreneur who has developed a really elegant product that has already made him rich with clients but he now needs an huge injection of cash to take his business to the next level had this very simple question for me. I'll set out to answer that now.
What are the expectations of investors? Unless startups know what investors expect and are looking for, it’s hard to give the right signals, prepare, and position your company to be the recipient of funding. So what do investors really want? In asking this question, it’s often easiest to first address what they don’t want, which is:
To lose money
To be made to look foolish
Everything else, including expectations, circles back to avoiding these two pain points. Some expectations may be arrived at naturally and individually. Many others are line items that investors believe they need to check off. But they all come back to avoiding these pain points. Here's is a list I came up with of items that investors want and expect:
A well-thought-out and researched business idea and plan
Organization
Integrity and character
Answers to obvious questions
That you know what you don’t know and don’t have, but you have a plan to get it
Market potential
Plans for repayment if seeking a loan
Plans for additional rounds of funding and/or exits
That you have put your heart into the project
That you have and will keep skin in the game
Feedback from others
Proof of demand
That they can get along with you
That you are coachable
Consideration of the safety of their capital and time
That you're good match
Passion for your product or service
Passion for connecting with and working with them
An opportunity that will take them closer to their goals
While pitching and engaging in other fundraising efforts (and even in the activities leading up to those efforts), you must keep in mind that you are not selling your product. You are selling an investment in your company. This shouldn’t mean completely redesigning the venture and sacrificing the original vision simply to raise funding (although some do go through the process when it becomes apparent that it is needed).
Still, if as a founder, you work to know your investors as you do your customers, you'll find the fundraising process easier. Understand investors’ fears and pain points, their checkboxes, and their goals. This doesn’t just mean cold monetary goals.
Go well beyond promised return on investment and crude sales and cash-flow predictions.
Institutional and individual investors have metrics and numbers that they are trying to hit.
What else drives investors to invest?
Outdoing their competition, bragging rights, strategic navigating, the desire for security, and a drive to fulfill their potential fuels and facilitates solutions that they care about. These are constants.
Then there are the factors that are more spontaneous and heat of the moment.
Does a decision maker need to impress or please someone else in the chain by making an investment? Can a Shark Tank scenario be created that fuels competition between investors?
As much as we each believe otherwise, when we launch a venture, a startup is far from a sure thing. Without capital and connections and expertise that can influence markets’ future performance, a startup is often a string of optimistically strung-together dots and assumptions.
Refer to the checklist of investor questions I gave above to give yourself an advantage during the process. Once you can answer all of those questions, you'll be pitching your company formally by way of proposals and presentations. Until next time! Six