So, when am I investment ready?
This is an interesting question that my Business Mentoring clients often ask and not always one with an easy answer.
Most entrepreneurs have great ideas with great vision- let’s be honest that’s why they become an entrepreneur – well successful ones anyway.
It can be tempting to move to an investment round ASAP but there can be some big pitfalls.
So, ask yourself some key questions.
- What do I have that others want to invest in?
- Why should an investor give me their money?
- What does the investor add or is it just cash (I will revisit this important point)?
- What other support is available – via Grants, Government, Incubators?
- What is my business worth, do you know how to value it?
- How will an investor value it? – this is a different question with a wildly different answer!
Ultimately any investor wants to understand if I give you my hard-earned money what will I get back, or another thing which is becoming more prevalent – how does this benefit society.
Understand if you are pitching to an ethical investor – they will have different drivers.
But let’s not get ahead of ourselves.
To be investment ready you must be able to show that there is a clear glide path to success and profitability. Most businesses seeking early investment fail – it is a simple fact. Investors are normally looking at picking a portfolio of investments to spread their risk.
You must be able to explain the following succinctly.
- What does the product or service do?
- Why would anyone want it?
- Is there a clear consumer need or do you have to create one?
- What data/research do you have to back this up?
- What makes your product or service different?
- Is it new or who are the competition – why you?
- When will it be ready, does it work?
- Will I sell this or licence it?
If you can answer all of the above questions for yourself, then you may be investment ready.
SO, what do you now need to get there, and what support, skills and expertise do you need?
Any investor wants to understand you know what is needed to bring it to market and you are realistic about what support you need.
Be very clear on timescales and burn rate – but also be realistic
This then brings me back to what does an investor add?
When looking at how much equity to give away (essentially sell) there are some key elements to consider.
- How much do I need to bring it to market?
- How much do I need for marketing?
- What does my cash-flow look like?
- How many rounds of investment do I envisage?
- How much equity am I prepared to give away?
- Does the investor add value to the business, either through skill set, contacts, or route to market?
- Understand dilution – I will leave you to read up on this.
- What is the business worth?
There is a great course offered free by DUKE UNIVERSITY to help you understand how you can value your business and how an investor will value it. As I said before these are two very different values and you will want to try and meet somewhere in the middle.
When I speak with most start-up businesses and those that I mentor, they overwhelm me with how wonderful their business is and all about all the fantastic (usually) new things. But essentially, as a Business Mentor I want the questions answered that I have asked above.
If you can answer all the above for yourself – then that is what you need to pitch.
If you invest with me – this is what it does – and this is what you will get.
Yes, the investor will want to know how committed and enthusiastic you are but don’t get carried away. If they are to invest then they are thinking can I work with you, do I trust you and are you competent to deliver. Do you have the right team around you who are equally committed?
Once you have decided to go for investment put yourself in the investor’s shoes. The more risk you can remove the more likely they are to invest and the more equity you can retain.
It is a simple risk v reward equation.
Prior to your pitch, practice, practice, and practice.
Think of the questions you are likely to be asked and include them in the presentation.
If there are weaknesses identify them and mitigate them, far easier to do this when you are in control than to have to answer them at the end “get your retaliation in first”
Research your audience if you can.
Stay calm, remain focussed and understand your red lines for negotiation. Be realistic about what you will give away and what you won’t. Walking in and offering 2% valuing your pre revenue business at £1,000,000 you had better be sure it is worth this. Don’t insult your potential investors, do your calculations, and show why its worth X. Also remember where entrepreneur relief kicks in for tax purposes.
Any investment pitch must be a win: win scenario and if it’s not resentment will creep in later down the line – its just how we as humans are wired.
Ensure both parties feel it is a good deal or simply put it’s a bad one!
Be clear, focussed, and succinct with yourself and any potential investors- this will always give you the best results.
Focus on the things your investor wants to know – not what you feel compelled to tell them.
Its about them not you.
Be open, honest, realistic, confident and above all be yourself –