Financial Friday – What Investors Look for in a Start-up!
Wooing investors is a full-time job, and even if you commit yourself to it, there’s no guarantee you’ll find the funding you’re looking for. Most investors, before they even consider your business as a potential investment, will take a look at your business plan–sometimes just a quick one–and instantly determine whether or not you’re worth their time.
To the new entrepreneur, this is an intimidating notion. But it becomes a lot less threatening when you realize that you can craft your business plan specifically to make your idea more palatable to potential investors.
There are many things investors want to see in a business plan, and you’ll have to cover all of them if you want a chance at success:
- Momentum — The number one thing that investors get their cheque-books out is for momentum. Everyone has their own definition of momentum (user numbers, revenue, channel partners, biz dev deals, whatever). But the reality is that this nebulous term people talk about that they “need to see traction” really just means that they’re not ready to invest in your company. Why? Chances are they don’t know you well enough and can’t judge your performance or capabilities. Some have “rules” — everybody breaks them for the right deal.
- Research – Your idea might sound good on paper, but to an investor, you must back your claims with real data. If you don’t have original and secondary research to support your ideas, you can count yourself out of the running.
- Management Team — Different VC’s have different calibration points on the continuum of management, product or product / market fit. I’m personally 70% management, 30% product. But for any investor it takes a miracle to get investment dollars out of them if they’re not impressed with the team. You will find some investors who will say to themselves, “I could do this deal but the CEO will need to be replaced.”
- Financial Track Record – Cashflow is the best test of an idea’s credibility. Investors will definitely want to check how many real, cash-paying customers you already have.
- Evolution. If it looks like your idea is still in its infancy, few investors will bite. Your business plan should reflect an ongoing system of reflection, reconsideration, and revision.
- Contingency. Your business plan needs to address your potential courses of action should any of your major assumptions prove to be false, or should something go wrong in the first few months of your plan.
- Experience. Your business plan should describe why you, specifically, have the expertise necessary to make this business a success. If you can’t show that, even a great idea could be rejected.
- Establishment. What have you done already for the business? What partnerships have you made? What deals have you closed? There should be some foundation in existence, even if it’s only slight.
Even if you don’t find an angel investor, that isn’t necessarily the end of the road. You can call upon your savings or friends and family members, you can launch a Kickstarter or similar crowdfunding campaign, and you can open a line of credit for your initial years of operation. If you believe in your idea, you can never let initial rejection stop you.