Your attractive face, polished patter, crisp wardrobe and firm handshake may get you a meeting with an investor, but that’s about it.
Savvy investors want more than show. They seek substance – from your management team, your financial statements and your business plan. If you want their cash, you’d better be prepared to deliver.
Here’s what investors typically seek from a business opportunity.
Clear exit strategy
Answer their (multi) million dollar question: How will I get my money out?
You may plan to grow old with your beloved business but an investor does not. An investor wants to know two things: how much money their investment will earn and when they will get it. An exit strategy should answer both.
An exit strategy is built right into the business plan and typically involves one of the following scenarios: selling the business to a financial or strategic acquirer; or, ‘going public’ with a listing on a major stock exchange (called an Initial Public Offering or IPO). In some cases, the investor may simply sell her shares to another investor for a profit.
Your plan should clearly communicate which path the business will take toward returning investor generosity.
Return on investment
Believe me...your investor wants to turn a profit. While some investors sign on to support your cause or your mission, most want to enjoy a reasonable rate of return.
It’s dangerous to pledge a ridiculous rate of return in a wild attempt to attract investor money. Serious investors will see right through overly optimistic numbers. However, your investment opportunity should be worthwhile: most investors seek five times return within five years.
Track record or strong management
It can be difficult for a start-up to attract investment because investors want to see some early numbers. If your business has operated for 3 to 5 years, you’ve likely generated the kind of early performance numbers that an investor can sink her teeth into.
But numbers are often not enough. An investor will also look for a strong management team.
Ideally, your team will collectively possess substantial industry experience (so the investor believes you know what you are doing), prior success in generating investor returns, as well as relevant expertise in marketing, management, human resources, finance and operations. Showcase those talents in your investment prospectus or presentation.
Equity means input, so be prepared to involve your investor in business decisions. How involved your investor becomes is something that may depend on the level and nature of their investment. A proverbial seat at your boardroom table is expected, but involvement in day-to-day operations is negotiable – in fact, such hands-on involvement may not be something your investor wants.
Reports and communications
Taking investor money is a serious move, so don’t be surprised at the level of reporting your new investor may require. Naturally, your business will be expected to supply regular financial reports both quarterly and annually. Your financial team will prepare those documents.
You’ll be expected to do a little a bit more than send financial reports.
As a principal in the business, you’ll be expected to meet regularly with your investor to supply an official update on your company’s progress. You’ll be asked to provide some insights into the numbers appearing on your financial statements. You’ll also be expected to go a bit beyond the numbers by sharing your thoughts, opinions, fears and challenges.
Open up to your investors by communicating honestly with them. These are likely very seasoned businesspeople with sufficient experience to solve most of your problems. And, they’ve got a vested interest to do so.
Treat them like the members of your team that they are, by giving them plenty of information about what’s really going on inside your business.
Before you take on investors, be sure to consult with your team of financial and legal advisors. For assistance, contact your Scotiabank Small Business Advisor today to review your financing options.
Have you invited investors into your business? Please share your thoughts on this important subject with our community.
By Roger Pierce, Small Business Expert for Scotiabank
Article originally featured on the website: Get Growing for Business. Find additional information and tools relevant to your business.