Author: Brent Davis
For many small businesses taking on investors is an essential process.
Many banks are reluctant to take a risk on start-ups with no parent companies and even established small businesses. This leaves entrepreneurs with very little choice but to look for investors who are willing to back their ideas.
If you’re new to the world of start-ups and investing then the process can seem overwhelming. We won’t sugar coat things, it really can be overwhelming, even for those of us that have gone through it dozens of times. It can also be a time-consuming process and there is no guarantee of success.
So, why do so many people put themselves through this stressful process?
Well, it can have huge rewards – for both the business owner and their investors. Backing the right idea can lead to huge returns on investments. If you have a good idea for a business then it is very likely that someone out there will be willing to take a risk on you.
However, many people are unsuccessful in this process because they approach it in the wrong way. They either pitch to the wrong people, or they pitch way too early in the development process. Doing either of these can lead to instant rejection.
Even if you are successful in finding investors, you can also run into problems. Inexperienced entrepreneurs are often so desperate to find an investor that they take on the wrong type of investor.
Or even worse, they oversell the potential of their business and are left with a lot of angry investors who have lost money on them.
How can this guide help you?
This guide is going to help you streamline the process of finding investors for your business. It will help you to map out exactly what you need to do to be successful in this endeavor.
We will be talking you through the pros and cons of bringing on investors. We will be explaining the different types of investors that your business can take on. We will be looking at how to attract the right investors and what these investors will be looking for.
We will then be covering the most important part of this process – putting together a comprehensive business plan that wins your investors over. We will talk you through how to pitch to investors before covering a few alternative forms of capital acquirement.
Most importantly this is a guide that is designed not just to get you an investor, but to help you find the right investor for your business.
Pros & Cons Of Business Investors
If you’re reading this guide, then you probably have your heart set on finding investors for your small business. We are not planning to try and talk you out of this. However, we want to share some of our experience of working with investors as a small business.
While taking on investors can be the difference between a pipe dream and a fully-fledged small business. We think that entrepreneurs should take the time to educate themselves on some of the downsides of working with investors.
That way you will be completely aware of what you are getting yourself into.
An investor is someone who provides capital in exchange for partial ownership in a business. If the business has any financial struggles later down the line, they can take on new investors or trade ownership for more capital from their current investors.
This type of investment not be confused with or treated as a loan.
The pros of taking on investors
Many of us don’t have the capital that is required to launch a small business. Taking on investors can be a better option for many of us when compared to taking on bank loans.
Having investors backing you can remove a significant amount of financial pressure and give you time to establish your brand. Bank loans require repayment no matter how well the business is doing.
Many small businesses with loans are unable to reach their full potential before running out of capital. Taking loans out can also stifle growth in the long run particularly if your business has high overheads.
Investors take a share of the profits, rather than eating into any form of money made like loan repayments do. Investors also do not charge interest.
Investors take a risk when investing in companies. If you take out a loan you will have to repay it whether your company is successful or not. Investments are not required to be repaid if the business fails.
A silent investor is a name the industry uses to refer to as investors who want to fund the company but who have no interest in getting involved in the day-to-day running of your business. Many businesses thrive with the help of silent investors.
The cons of taking on investors
While this system does have many positives, the process is not always smooth sailing. Taking on investors can have some real downsides, especially for inexperienced business owners.
Many businesses are not able to find silent investors, this can result in the company being put under a lot of pressure to produce growth.
As we mentioned, for an investor supporting a company is a risk. One that could really pay off, or one that could lose them a lot of money. Because of this, they tend to want to see faster rewards than a bank would.
And they will often push for short-term growth that may not necessarily benefit the business in the long run.
This kind of pressure can make a business an unpleasant place to work. And the stress caused by the investors tends to trickle down through every level of the company.
Furthermore, if you decide to take investment from friends and family you may notice a change in your relationships. Especially if your business is struggling.
One of the most important things you can do when pitching to your investors is, to be honest with your profit predictions. Every business takes a different amount of time to start turning a profit.
If you give them a realistic idea about how long you will be running at a loss for they are less likely to pile on the pressure when you don’t make them money on Day 1.
Different Types Of Investors Explained
Now that we have talked about what taking on an investor really involves, let’s move on to looking at the different types of investors that are out there.
As a small business, you should be aiming your pitches at two main types of investors; Venture capitalists and Angel Investors. In this section, we are going to cover what these investors are and how they can benefit your business.
We will also briefly talk about another type of investor you may want to consider.
Forbes once said ‘VCs are the holy grail of investors for fundraising entrepreneurs.
They come with the biggest checks, the most power to fuel success and gaining market share, and the most juice when it comes to achieving more credibility and visibility.‘
Venture capitalists most likely to get involved in funding business ventures as early as possible.
This is where they tend to see the best return on their investment.
Venture capitalists will most likely want to take an active role in your company. Whether it is as a board member, or by taking a job at the company.
They are typically experienced professionals and can be a great asset when it comes to turning a profit quickly.
If you are looking for a more small-scale investment then you should consider pitching to Angel Investors.
Like Venture Capitals they are investors that are actively looking for investment opportunities.
And they are more likely to take a risk on smaller businesses and start-ups than a bank.
More often than not Angel Investors want to be silent investors, and your business will be a small part of their larger portfolio.
This can be both good and bad for the business involved. These investors tend not to take a very hands-on approach. However, they are quick to cut their losses and move on if a company is not as successful as they had hoped.
Another option – Corporate Investors
Many larger corporations are currently looking to invest in start-ups that they think can add something valuable to the portfolios.
There are definitely some benefits to joining a larger network of companies.
But the downsides of doing this tend to outweigh the positives in the long run.
These companies have a habit of buying up smaller companies and shutting them down if they don’t perform as well as expected.
A prime example of this is the cosmetics conglomerate, Estee Lauder.
How To Attract Investors
‘Attracting Investors’ is a broad term that makes many entrepreneurs sick to their stomach. We have some good news for you – this is not as complicated as it sounds.
All this process involves is making your business as appealing as possible (to the right people) and actively pursuing the things that you want.
Here are our top four tips for attracting investors:
1. Know your purpose
It is your job to convince your investors that the world needs your business to exist. To do that you need to be clear on your company’s mission (or purpose).
As the head of the company, it is your responsibility to understand and communicate this mission. You should be able to turn it into an elevator pitch that will leave your potential investors wanting to hear more.
2. Understand the power of branding
When people think of your business, they are not thinking about the people who work for you and your warehouse full of stock. They are thinking about your brand.
Understanding your brand and its voice adds value to your company in the eyes of investors. The more time you spend developing your brand and capitalizing on its benefits the more attractive investors will find your business.
3. Take every opportunity
Mathematics tells us that the more times we try something, the more likely we are to succeed at it.
This is a rule that you should apply to your hunt for investment. Take every opportunity to speak to investors, set up meetings, and pitch your business. Not only will it make you statistically more likely to succeed.
But every meeting will teach you something new about your business plan or your pitching method. Learning these lessons will make your next pitch even better.
Remember you only need one person to say yes.
4. Don’t give up
A ‘no’ from one investor isn’t a ‘no’ from every investor. Rejection is part of the process. Some even see it as a rite of passage. You should see rejection for what it is – a small setback that you will work past.
When we’ve experienced rejection, we like to take the time to read the stories of other people who have been rejected but have gone on to do amazing things. We like to do this to remind ourselves that rejection doesn’t have to be the end of this journey.
You wouldn’t want to be any of the 12 Publishing Houses that rejected Harry Potter. Or the TV network that told Oprah she just didn’t have the right personality for television.
When the rejections come, dust yourself off and keep moving forward.
Things Investors Look For Before Investing
We can boil down what investors are looking for into one every simple point. Investors are looking for a return on their investment – i.e. they want to make money from their investment in your company.
Unfortunately, that’s not something that is always in your control. So let’s look at some elements that you can tangibly harness to make your business a more attractive investment opportunity.
Investment is a risk. All investors understand this.
What that doesn’t mean however is that they are willing to invest blindly into companies.
They are looking for attractive investment opportunities with good prospects.
So, how can you show potential investments that your business is a smart investment opportunity?
With heap loads of data.
Investors want to make money, so it is your job to put together the data that will show them how they can make money with your company. This can be difficult for start-ups, but through extensive market research, you will be able to prove there are opportunities for growth in your potential market.
If your business has been around for a little while then the investors will be expecting to see an impressive performance for an extended period. One quarter isn’t enough, they’ll be looking for 6 or 7 impressive quarters consecutively.
A Solid Business Plan
By the time you finish this guide, you will be sick of reading the words ‘business plan.’ But there is a reason why we won’t stop talking about them!
Having a solid and comprehensive business plan is essential when seeking investment.
A business plan shows your investors that you understand what you are talking about, that you are willing to invest time into your business, that you understand the market that you are entering, and much more.
Your business plan is your main opportunity to show how much of an asset your company will be to its investors. It is your roadmap to success.
Determination And Hard Work
Investors want to invest in entrepreneurs who are committed to and believe in their businesses. They want to know that you are going to invest in the company too.
We don’t mean investing money, although many people do invest money into their own companies.
Investors want to see that you are willing to invest your time and effort into your business.
They want to know that you won’t give up when things get tough, which would result in them losing their money.
They want to know that you are determined and hard-working.
Investors are often looking for the quickest way to see a return on their investment.
They are most likely talking to more than one company about investment opportunities.
And how close a business is to launch is often a significant deciding factor for many investors.
This is why we recommend avoiding pitching to investors too early. You really do want to have all your ducks in a row before you start looking for funding.
Not being prepared will make you look unprofessional and could have the investors questioning your commitment to the project.
The uniqueness of your proposal
There are very few ideas out there that are truly original. So, part of your job as an entrepreneur is to set your business apart from the rest. You need to present your company in a way that leaves no room for doubt.
In a way that leaves your investors with no questions about what makes you unique or exciting.
The easiest way to achieve this is to invest time into developing the ideas that you will build your business on. Do your market research. Get feedback. Talk to experts in the field. Be passionate about your business and that will resonate with your potential investors.
How To Write Your Perfect Business Plan
We find that many entrepreneurs and future small business owners are reluctant to put in the time to create business plans. We still find this a little shock, as we think putting together a business plan is an essential part of starting a business.
We are going to spend a lot of time talking about Business Plans in this guide because they are the most important element of securing finance for your business. The success of the advice in the rest of this guide relies on a well-crafted business plan.
We believe that all business leaders should be producing two types of business plans before applying for funding:
(a) a comprehensive plan that covers everything from market trends, advertising strategies, and management structure in great detail. And (b) a one-page business plan that they can hand out to potential investors and at business meetings.
Why do you need both?
Well, creating a comprehensive plan will help you to explore, flesh out, and fully realize all areas of your business. You’ll learn a lot whilst doing this and it will be useful to have on hand when you investors want to know more about your plans.
Having a detailed business plan shows your investors that you are a professional and that you are going to take their investment seriously.
If you can’t boil your business plan down to a snappy one-page document, then you’re not ready to pitch. You may be struggling to do this because you don’t fully understand your plans yet, or because you haven’t worked out the main strengths of your idea.
Creating this one-page document is an essential part of your preparation for a pitch. When you are able to present a punchy, streamlined version of your concept it shows your investors that you know what you’re doing.
Is there anything I need to do before creating my business plan?
The majority of your business plan will be based on market research. If you haven’t done any market research yet, then now is the time to do it.
Not sure what to research? Start with these topics:
Who are your competitors?
How much do they make?
How big is their staff?
Where are they based?
What are their reviews like?
What are their weaknesses?
What can your company learn from them?
What is the market like for your product or service?
Is it oversaturated?
Are there any gaps in the market?
Is there a lot of money in it?
Is there a big market for your product or service?
What should I include in my comprehensive business plan?
We recommend you include at least two pages on the following: