What Investors Look for when Choosing to Invest in Your Company?August 18, 2021
For us entrepreneurs, starting a business is expensive. The inflow of cash needed from outside finances hay come from different types of loans or cold hard cash. These loans can be either a traditional loan or a micro-loan. Another way to gain early financing for your small business is through an investor. When considering potential investors, it is important to understand what they will be looking for on the other side before potentially funding your business.
Who wants to invest in small businesses?
First, it is important to understand the difference between loans and investments. Loan lenders are giving you money in order to be paid back later with interest. Investors are looking to give you money in exchange for partial ownership of the company. Investments also come with many restrictions and rights for both your company and the investor. If you are looking for investors, you should be setting up a Board of Directors to guide the company and inform the investors of significant changes within the company. Investors also have the right to vote on new members of the Board of Directors as part of their ownership.
There are many benefits to having investors in your company. First, they will not be demanding their money back as opposed to lenders. Also, they are truly investing in the mission of your company, meaning that they are a great source of business advice. They are the most knowledgeable people in the market, and can also help connect you to the best network to grow your business.
What makes investors interested in your company?
The main goal of investors is to make a return on their initial investment. They want to see growth in your company. Your main goal in turn should be to show investors that your company has the ability to make them money.
It is also important to remember that investors are people with differing values and need to be treated as such.
Here are some of the best ways to make sure you cover each potential investor:
1. Know the Numbers
Investors often look first towards the financial statements to see if your company has the potential to grow and make them money. If you have already established your business, you should show your success thus far. If you have just recently started out, it is important to show how you plan to crunch the numbers and how you expect to earn money in your clear business plan.
2. Plan of Action
Your business plan is key to gain trust and investments. A strong business plan can demonstrate your commitment to the company’s success and plans for the future. Your business plan should include:
- An executive summary and overview of the company
- The plan of operations
- Intended market and analyses
- Your products and services offered
- Sales and distribution channels
- A competitive marketing strategy
- A projected timeline of operations
- Potential obstacles and challenges
3. What Makes You Unique?
In order to convince investors, you need to demonstrate how your business idea is different than others. Your business model should grow off existing ideas. This “competitive advantage” is what will make you successful over the competition and explain why.
4. Your Story
As mentioned at the beginning of the article, investors are people! Hearing about what makes you special makes investors believe that their time and money are special. They want to hear about why this is important to you, where you thought of the idea, and where you want to take it. Your story is essential when planning a pitch to potential investors.
5. Do Your Due Diligence
Investors want to see that you are ready to take off. In order to be ready, you need to conduct some market research and show knowledge of the market. This research should be illustrated in your business plan and can also include an exit strategy for investors.
6. Have a Distinct Valuation and Investment Structure
Investors may also want to know if you are considering other options and if you have legal documentation to do so. One document that is necessary for many investors is a stockholder’s agreement. This agreement lays out the rights of every shareholder in the company. The document should also address shareholder responsibilities, implications of leadership changes, and strategies for business foreclosure.
You need to be able to show what your business is actually worth so investors can understand what their investment can be valued at. Gain control of your company and the investors by coming prepared for negotiations about your business.
In order for your business to be successful, you need to understand who you are entrusting with your business. You should also understand what they want in order to make your business more attractive to investors. These are simple reminders to create a pitch, be investment-ready, and take your business to the next level.
Madeline Pernecky is a Dallas based writer for Global Leaders Organization. She is also an undergraduate student at Southern Methodist University, working towards a bachelor's degree in Business Marketing as well as minors in Advertising and Spanish.
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