Does your business have the ‘wow’ factor? Investors have strong ideas about what makes an investment desirable, so how does your business fare?
Put yourself in an investor’s position. Many investors have been burned by poor investments. To minimise risk they have developed a list of desirable investment features in a business.
The ‘wow’ factor
Are people enthusiastic about your business idea? If not then there’s no way you will get an investor enthusiastic. Investors are most impressed by sales as these dictate revenue and profits.
Your commitment
Other people will not invest in you unless you have invested in yourself. Investors want to see your commitment to the business in two areas:
- your commitment in terms of cash and assets
- sweat equity (capital) - your personal time and energy. Calculate how much time you have spent on a project and multiply it by an appropriate hourly rate.
It also depends on your personal circumstances. A university student with a thesis that forms basis for a new technology will have little money to contribute. If an ex-CEO of a large corporate has savings and assets, but doesn’t want to contribute money to their business, investors will not see this favourably.
Investors will also want to see that once you are in business, you are fully committed to it. Other jobs or businesses will tend to divert your attention.
A strong business track record
Past business success inspires trust. Investors will be looking for a business that is capable of carrying on independently of you if required. They will also be interested in your character and integrity as a business person and will do background checks on you.
A sustainable competitive advantage
What do you do better than the competition? Why should the customer buy your product or service rather than someone else’s?
Can you list five advantages? They might include:
- leading edge technology that no one can copy
- contracts with key customers
- patents, trademarks or copyrights
- a great location
- an established and trusted brand
- innovative staff locked in with shareholding options or profit sharing
- a high entry barrier industry.
An attractive business model
Software companies are a great example of businesses with high margins that can be duplicated. They make a product, protect it by copyright and terms of its licence, manufacture it a little cost then sell it at a high cost.
Barriers to entry by competition
You will need to show that you have taken steps to beat off the competition. This includes:
- consulting with an IP specialist to protect your intellectual property (IP)
- signing employment agreements with staff to clarify that IP is owned by the business rather than individuals
- creating enduring barriers to entry by others such as your commitment to research and development.
A business platform rather than a product
Investors are more likely to invest in businesses that have developed a platform from which many products or services can be marketed or developed.
An already successful business with a strong team
Venture capitalists in particular, are more interested in successful businesses than ideas and will look at the strength of your team. Do you have people with relevant skills spread across your team, a forward thinking management team and a board with appropriate networks?
High-growth potential
How big is your potential market? Are your products and services of value to an international market? If not it’s unlikely to be big enough for a venture capitalist.
However, if you have the ability to go global you need to be able to demonstrate your growth potential through your trading results or market research. Be specific about your target market, ie who will be buying your product or service.
Find out more about identifying and researching export markets
Established distribution channels and revenue streams
Have you developed any innovative strategic alliances or joint ventures? Do you have locked-in or sustainable revenue streams? What other distribution channels have you explored?
Where is your business on the life cycle?
What stage in the business life cycle is your business at?
- Development – seed capital stage, you haven’t had any sales and your money is used to develop the business.
- Start-up – you launch the products or services. You spend time educating the market and spend money creating awareness of your service or products.
- Growth – the business is taking off with your focus on getting product made or delivering the service.
- Expansion/maturity – competitors are catching up to you, sales growth slows, you may still have a good market share and a thriving business.
- Decline – your business is no longer in demand, under threat from substitutes or no longer needed. You may still be able to sell the whole business or assets.
There are investors for every stage. If you find your business looks less than desirable, don’t give up. Identify what can be done to make your business more attractive to outside investment and take up the challenge.
