Most entrepreneurs start a business with the conviction that funding is going to solve everything. They are so compelled by their vision for their business that they lose a hold of what investors are really looking for. If you are seeking an investment in hopes that the investors will take a leap of faith on you, you are going about funding in the wrong way.
Before seeking investments from angel investors or venture capitalists, you need to gain momentum. The idea that funding is what is going to be what gives your business that initial momentum may be true, but good investors (the investors you want) are not willing to take those kinds of risks.
Make sure you’re not in for disappointment before approaching investors by asking yourself the following questions:
“Does Your Market Appeal To Investors?”
If you are targeting a niche market in hopes that there will be fewer competitors, you need to validate that market’s growth potential through situational analysis. You need to identify your target-consumer and what your competition looks like. If you are unsure of the appeal that your market will have with investors, find an advisor who has experience in your market. They may even be so compelled by your idea that they will invest.
In a small market that is growing slowly, investors won’t bite until they see proven research that you will be able to dominate the market. Otherwise, it will be difficult to receive an investment. Investors are looking for a business with enough growth potential to make the risk they are taking worth it.
“Does Your Target-Consumer Have Interest?”
Although it may seem obvious, you need to begin the funding process with the consumer in mind. After all, they are determinant in whether or not your business will be able to succeed. Even if you have no sales, you need to show evidence of the demand for your product or service.
Find customers who are willing to evaluate your product. In an ideal world, you would find a group of potential customers who are willing to participate in a case study to prove the effectiveness of your product or service. Another compelling way to demonstrate your credibility is through customer testimonials. Keep in mind that investors may want to talk with the customers in order to better understand how your product or service helps them.
“Do You Have Capital Structure?”
Going into an investor meeting, you need to demonstrate your ability to effectively use capital in order to grow your business. In the early funding stages, investors are looking for an accurate evaluation of the business so that they can gauge what percentage of ownership they will need in order to make their risk worthwhile. For example, if you are valuing your company at $1,000,000, an investment of 5%, or $50,000, is going to yield a significant risk with not enough reward. If you plan on entering the meeting asking for a low-equity investment, make sure you are willing to negotiate the amount of equity. Remember, the investors are taking all of the risk. It needs to be worth it for them.
You also want to keep your equity open for future investment, when the evaluation of your company is going to be higher. That’s why it’s so imperative that on your first rounds of funding, you propose a deal where you don’t lose too much stake in your business, but just enough to incentivize investors to contribute.
“Are You Targeting The Right Investors?”
Investments go beyond raising capital. The life of a company is long.You need to be very selective about who you choose as an investor, or else you may end up regretting your decision for many years to come.
Prepare questions for your investors about their prior work and investment experiences. You will want to ask about the relationships they have with the CEO’s they have backed in the past and what they expect of them. Ask about what value they bring to your business beyond providing capital. Make sure you are clear about what roadblocks you are facing now and any impediments you may foresee. The clearer you are about the problems you face, the more likely it is that you will find an investor who is able to help you with those problems.
Investors want to know that you are the correct fit just as much as you want to know if they are. Include in your pitch how you came up with your idea and how you assembled your team and why. They want to know that the business isn’t going to fail due to a lack of communication between the members of your company. Investors are going to make their decision based on the merit of the idea and the skills your team has to make it thrive.
Don’t sell yourself short by thinking that the right investor is not out there. Too often do entrepreneurs get so caught up in their need for capital that they accept a contribution from an investor who has nothing else to give but their money.
For those seeking an investment for the first time, the most important thing is seeking guidance and objective feedback from successful entrepreneurs. Create your business structure, validate your market, and target the right investors.