Tweet

Ten key hooks for investors in early stage businesses

Guest post by: Guy Rigby

Article Overview: Family and friends are a great source of funding for start-ups and early stage businesses, but raising money from external investors or business angels is more challenging. Here are ten of the key issues that investors will be considering when they meet you or read your business plan.

Ten key hooks for investors in early stage businesses

1 First impressions

First impressions are critical. Most investors will decide whether to proceed within the first 30 seconds of any discussion, or within a minute or two of picking up your business plan. Think about your approach, test it on your friends and practise it to perfection. Don't fall at the first fence.

2 Demonstrable need

Where is the pain and what exactly is the need for your particular product or service? Most businesses offer 'me too' opportunities which are not obviously exciting to an investor. Make sure it's clear how and why yours is different. Is it better, faster, cheaper or is there some other reason why you will succeed when many others fail?

3 Existing revenues

Raising money for a business with pre-existing revenues is far easier, as demand for your product or service has already been partially proven. The fact that you have already established the beginnings of a customer base will carry huge weight in any discussions.

4 Strategy

You may have a great idea, and you may have existing revenues, but what is the future for your business? Do you have a vision? If so, is it realistic or just 'pie in the sky'? We've all seen those hockey stick-shaped graphs showing an embarrassment of riches only a year or two down the track. Don't be tempted to over-promise and under-deliver. It's normally transparent from the start.

5 Business plan

The credibility of your proposal will be reflected in the quality of your business plan. A poorly presented, badly researched plan will kill your proposal before it has a chance. An idea may be good enough to gain the backing of family and friends, but it won't cut the mustard with serious investors. As the saying goes, if you fail to plan, you plan to fail!

6 Business model

Your business model will determine how and where you make your profits and how you will build long-term value in your business. A model that requires huge revenues to deliver small profits is inherently unattractive, whereas a business in a niche market with high barriers to entry will get potential investors excited.

7 You

Are you credible in the eyes of the investor? What is your track record and what experience do you have of your business? Most successful entrepreneurs 'stick to the knitting', creating businesses based on their passion (something they know and understand), personal knowledge or experience. If this is limited, get the support of a mentor or partner. This will demonstrate maturity in the eyes of your investor.

8 Financials

Businesses go bust because they run out of cash, so be sure to demonstrate a good understanding of your financials. Margins and overheads will be part of the discussion, as well as working capital and cash flow. Remember that small businesses are normally cash constrained and prone to overtrading, so the investor will need to understand how you will manage this.

9 Pricing

Don't be tempted to overvalue your business. We are a long way from the heady dotcom days when investors were persuaded to part with large amounts of cash based on little more than an idea. Nothing will put an investor off more quickly than an excessive or unsupportable valuation. The more you need, the more you will have to give away, so be realistic, cut your cloth to fit and take in as little external funding as possible.

10 Exit

It's very easy for investors to put money into your business, but how will they get it back? A vague idea that you would like to buy shares back at some future date is unlikely to be attractive. Taking in external funds means that you need to 'begin at the end' in terms of thinking about exit, having a clear strategy and plan. This may change as the business grows, but you need that stake in the ground.

These are just some of the issues an investor will be thinking about, often subconsciously, in the short time that he focuses on your business. If you've thought it all out beforehand and you can tick all the boxes, you'll have more chance of success.

Good luck!

Related Articles
  Do I Offer Debt or Equity to Raise Capital
  Thinking Like an Investor
  Attracting Angel Investors
  Is there Venture Capital and Angel Investment Capital in a Down Market?
  canvas artwork wall art
  Hey, What if the Founder Gets Hit By a Bus? Nada
  Who Should Use a Regulation D Private Placement
  Should You Force Your Investors To Use Your Product?
  Financing Options for Start-ups
  FIVE GREAT LESSONS FOR ENTREPRENEURS for Standout Pitches TO ACCESS ANGEL INVESTORS
  Entrepreneurs Raising Early Stage Venture Capital are in a Beauty Contest
  Angel Investors Where Are You?
  Venture Capital & Picking vs. Poking
  Keep Your Message Focused to Get More Clients
  Gold and Silver Bullets: Critical Messaging for Successful Investor-Funded Firms
  Who Are Angel Investors
  Venture Capital & Recessions
  Staying on Target
  What are Angel Investors?
  WHERE START-UP FRANCHISORS CAN FIND CAPITAL

Article Tags: business plan, external investors, hooks, raising money, stage businesses



Related Forum Posts
Returns - Those are fairly accurate expectations. Part of the reason is high failure rate in early stage ventures. With VCs, they pool investments, so the overall return of their portfolio will be affected by some failures. You are also competing for money with other early stage deals. Mining is all the rage and usually has relatively quick exits. Not understanding what the investor expects is one of the reasons that early stage people have difficulty raising money. The other is not having a clear strategy for the next round or exit for the investor.
Mentoring events for Entrepreneurs - These free events are held monthly for a select number of early stage ventures. If you have a high-quality early stage project, register an interest in participating and we will try to accommodate you.
Financing % - Usually investors in early stage companies are looking for 30%+ average returns per year. They don't expect the first years to pay well but do expect the later years to outperform and on average total at least 30% per year. That being said, the deal is whatever you make it to be. Some investors will want more and if it's highly speculative, you might not have many options.
Re: Securing Financing - well , All new companies need financing of some sort to launch operations. In some cases, entrepreneurs are able to simply dip into their existing personal savings accounts. For example, Jerry Greenberg and Stuart Moore, who co-founded Sapient Corp. in 1991, used $40,000 of their own savings and charged nearly $70,000 on their credit cards rather than seek outside funding for their new information technology (IT) consultancy. In other cases, entrepreneurs will ask a friend or relative for funding, as Gateway, Inc. founder Ted Waitt did in 1985, when he secured a $10,000 loan from his grandmother to establish his mail order computer business. Most often, though, new businesses will turn to outside sources such as banks and venture capital firms for startup funding. Because venture capital firms actually purchase a portion of the company they are funding, quite often they help to steer the firm's strategic development. Funding for firms which have not yet launched operations is known as seed money or seed investing, while funding for fledgling upstarts that have already opened for business is called early stage investing. Banks and venture capitalists also loan money to established businesses seeking additional growth; this process is known as expansion stage financing. Wealthy individuals who fund startups are sometimes called angel investors. To gain access to outside funding, entrepreneurs typically submit some sort of a business plan, which details exactly how a new or existing company will accomplish goals like launching operations, finding customers, making money, and expanding into new markets. Typically, the most successful business plans, at least in terms of securing funding, are those with a clearly defined target market. In many cases, once officials at a bank or other funding institution determine that a business plan warrants further consideration, they expect the individuals requesting the funding to pitch their ideas in person as well. Many investors also favor startups with experienced management, a diverse and qualified board of directors, and an exit strategy, such as a planned initial public offering (IPO), which allows investors to cash out in three to five years, if desired...............
Partnership questions - I am working on the project which is in its pre beta stage. This is a web based service that allows to distribute some content in a printed format. I got several offers from investors and printing companies regarding partnership and funding. Since I have a pre-beta version yet I have a lot of questions on how to deal with partners/investors. 1. what can I offer to my partners? for example, 20%, 30%, 40% share is the future business? how many present should it be? 2 should we sign any agreement to legally regulate the partnership? if yes, how does this agreement look like? 3. how to make these partners/investors involved into development of this business? I need someone to review the content/website, I also need help with organizing the infrastructure, legal things, etc Thank you.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Google Panda and Your Search Engine Rankings

Convening a focus group for a niche product

The Death of the Sales Magazine

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.