Some questions you might be wondering about investors are how safe it is to pitch your business idea to an investor and if you should send out market research surveys prior to approaching an investor. Are they looking for new ideas so that they can create businesses of their own or looking for you to prove your idea will work? The first step is to answer those questions and then we get into the mind of the investor.
While every investor has their own requirements and look for something that aligns with their personal interests and pursuits, here are some things you should consider if you want to stand a chance at getting funded.
The right industry
Investors and venture capitalists are looking to invest in businesses and industries that they can understand. For this reason, it is best to target your pitch and to build relationships with those people that are interested in your industry.
Often investors will advise or sit on a number of boards. They have little time to learn a new industry and to make contacts within that industry. A simple online search should reveal your investors interests as well as the portfolio of companies he or she has invested in.
You and your team
If your investor is a match with your industry, the next important thing is you and your team. If you are the type of person, they can see themselves working with, you have won half the battle.
Market share and competitive advantage
Your idea needs to have a large market share and be competitive in the market. If your idea is worth a lot of money, passing on your idea would be foolish. You will also need to have a business model or business plan that shows where you sit in relation with your competitors. Understanding them is a good starting point.
Having a bit of traction shows your ability to see your ideas through and gives investors a glimpse of where you might be headed. If investors see that with just a little bit of money you can do what you have done, they might start wondering what you are capable of with a whole lot more at your disposal.
For investors, traction minimizes risk. It is a chance to see how you perform and what you are capable of. To demonstrate traction, you might recruit a good management team, start making sales, build an advisory board or secure strategic partnerships. You are unlikely to get far with an investor if you do not have any traction.
Cash flow and a financial plan
Money is the heart of every investment. If your business is without the potential to make money, then it is not a business. You will be approaching an investor with a business plan that has your financials worked through.
The most important part of the business plan is the cash flow plan – how much money is coming into your business and going out of your business. You need to show that you can cover your own expenses without having to turn to the investor for money.
Seeing a good return on their investment is key and your financial projections on the business plan are there to give them an idea of how long it will take for you to make a profit and for them to recoup their investment. An exit strategy is not a plan for when your business fails but your strategy for returning money to the investor.
Reassurance on risk
Investors know this is risky business. Nobody is pretending you can produce a new business without risk. There are, however, factors that reduce the risk, keep it at a minimum level.
- A good team: founders they can believe in. people who know the industry, people with product development and expertise.
- Startup experience: having been through the process at least once before makes people on the management team more credible.
- Defensibility: investors do not want to see a good idea that services the world only to point competitors in that direction.