- Make sure your business is scalable to show investors how you can expand your customer base and increase your profits.
- Identifying your business’s competitive advantage shows investors that you know the value your business brings to its market.
- Tracking your business’s progress is a great way to demonstrate how your business has grown and why investors should feel confident funding it.
- This article is for entrepreneurs or small business owners deciding whether they’re ready to pitch investors.
While there’s no one right time for entrepreneurs or small business owners to reach out to investors, there are some important boxes to check first. In this article, you’ll learn some key areas investors analyze when they’re considering investing in a business. You’ll also learn how you can prepare your business to land a deal.
What are the types of business investors?
There are a few different kinds of business investors. While they all provide businesses with capital, they go about it in slightly different ways.
- Angel investors: An angel investor is an individual who makes more than $200,000 annually or has a net worth of at least $1 million. They invest their own money into a business. While many angel investors are willing to invest in startups, they often require a large stake or a controlling share.
- Venture capitalists: A venture capitalist is a person or group – typically part of a company – that funds mainly high-risk startups. Venture capitalist firms get their money from individual investors, foundations and pension funds. Because of their financial pools, venture capitalists can invest large amounts of money into startups. However, these firms often require significant control over the businesses they fund.
- Personal investors: Personal investors can be family members, friends or just about anyone else in your circle who’s willing to help fund your business. Because these investors lack the resources of larger companies, you might not be able to fully rely on personal investors to fund your business.
Why do businesses need investors?
Let’s say you relied on your personal funds to get your business to where it is today, but you need additional capital to keep growing. Investors can help you get this funding, thereby alleviating some of the risks involved with starting and running a business. This way, you can distribute funds to grow your business instead of covering operational costs only.
Investors can help carry the financial load of running and growing your business so you’re not straining your savings, taking out high interest business loans or dipping into your retirement fund. This is important: According to research by Fundera, about 29% of small businesses fail because they don’t have enough capital.
Signs your business is not ready for investors
When pitching investors, you must show that you can handle the funding you’re requesting. There are certain criteria investors look for businesses to meet before they consider making a deal. To help you see where your business stands, below are eight signs your business is not ready to pitch investors.
1. You don’t have a solid management team.
Investors decide to fund a business when they’re confident the management team can lead the business in a direction that will maximize their investment. Investors can easily spot a disorganized, unmotivated and uncooperative management team.
“Investors will be keen to see if the small business they’re interested in has a strong management team,” said Arthur Worsley, founder of The Art of Living. “This is crucial because investors want a team they can trust at the helm. This team should be capable of aligning the interests of the investors with the growth of the business.”
2. You don’t know if your business is scalable.
At the end of the day, there’s only so much work you and your management team can do without expanding your operations. You also need to figure out how to increase the number of customers you can serve without greatly increasing your costs. A scalable business has the potential to increase revenue while limiting operational costs. But is your business scalable?
“If the business is dependent on the founder, the answer is no. If the future demand is not sizable, then the answer is no – scaling is not warranted,” said Diane Thomas, president of Premier Sales, Inc.
“Scalability is an important factor when it comes to attracting investors,” said Brian Lim, founder of The Emazing Group, which received an offer from each of the investors on ABC’s “Shark Tank.” “Investors want to see that a small business has the potential to grow and expand over time. This means that the company should have a plan in place for how it will increase its customer base, add new products or services, and enter new markets.”
3. You don’t have an updated business plan.
Maybe it’s been a while since you updated your business plan, or maybe you never made one. Either way, you need an up-to-date business plan that details your business’s operations. Investors want to see how you’ll use any funding they provide. Your business plan can give investors a closer look into your business and its model.
“A well-thought-out business plan is essential for attracting investment in a small business,” Lim said. “The plan should outline the company’s proposed products or services, target market, and expected financials. This will give investors a clear understanding of what the small business is trying to achieve and how it plans to do so.”
4. You haven’t identified your competitive advantage.
Your competitive advantage is what separates your business from others in the same market and makes it unique. Investors want to know that your business can attract customers and keep them coming to your business instead of your competitors.
An investor might ask, “So what makes you different from your competition?” Having a strong, well-researched answer to this question can show investors the value your business brings to the market.
5. Your financial records don’t show profits.
If your business hasn’t turned any real profits, you might have a difficult time convincing investors your business can be profitable in the future.
“Financial performance is proof that the market is willing to pay for services or products at a price that shows the business makes a solid profit,” Thomas said.
You’ll need to show investors proof of your profits as well.
“Investors will generally want to see at least two to three years’ worth of financial statements,” said Andrew Shoemaker, a financial advisor at Hurley Capital, LLC. “As a business owner, you will come across as organized and transparent if you have this step down.”
6. You haven’t done any market research.
Conducting thorough market research can help you hone in on your target audience and find ways to connect with it. Investors want to see that you’ve done this research. This way, they know you understand how to effectively market your products or services. You don’t want investors to think you’re taking a shot in the dark and merely hoping your marketing strategy will reach the proper consumer groups. You want to show that it’s far more than guesswork.
Tip: Consider creating buyer personas and customer journey maps to determine the experience your target audience is likely to expect, then devise your marketing strategies accordingly.
7. You haven’t shown any strategy execution.
Creating strategies shows that you have plans for improving your business; putting action behind these ideas is what moves your business forward. You need to show investors that you and your team can create a plan and execute it.
“Investors use different scorecards when offering a deal,” said Jeffrey Zhou, co-founder and CEO of Fig Loans. “A business should have established strategy execution, which primarily includes a solid business plan and implementation methods, tactics to mitigate potential business risks, measuring and tracking KPIs, data reporting, and pivot strategies. A business that can demonstrate it has mastered these areas will look more attractive to investors.”
8. You don’t fully believe in your business.
Investors are looking for business owners confident in their businesses and the products they deliver to customers. If you don’t believe your business can be successful, you’re sending the message to investors that they also shouldn’t be confident in your business.
“An investor wants to ensure that, apart from the potential of the business or brand, the owner is determined to make the business work,” said Clint Proctor, editor-in-chief of Investor Junkie. “When investors see how determined you are, they are more likely to trust you and the growth of your business.”
How to prepare your business to pitch investors
Maybe you now realize you have some areas calling for attention within your business before you seek capital. Or maybe you feel ready to start pitching investors. Either way, there are several ways you can prepare your business to pitch investors. You can run these processes and strategies in the background while managing your business’s everyday operations.
1. Create systems for recurring revenue.
Systems that generate regular revenue are like gold to investors. They keep customers automatically coming back to your business while generating consistent cash flow. For example, you might offer a monthly subscription service through which customers can access deals, premium products and the best your business has to offer.
2. Track your growth.
By tracking your business’s growth, you can see how well your business is progressing and prove it to investors. Your annual revenue, annual profits, sales volume and customer acquisition costs are some key metrics you can use to track your business’s growth.
Set objectives for your business along with milestones you want to reach. From there, you can see how your business is progressing and identify ways to encourage growth.
3. Draft a funding plan.
Investors want to know you have a clear plan for how you’ll use their funding. You should share a funding plan to show that you’ve done your research and know exactly what your business needs to grow.
If your business primarily needs new software, explain the benefits that this software will bring to your company. If you’re aiming to expand to a second location, explain how that expansion can multiply your business’s profits and greatly increase your market presence.
4. Create custom pitches.
When you’re ready to start presenting to investors, create custom pitches for each presentation. After all, every investor is different. Where one might favor businesses focusing on innovation, another might have a heart for small, family-owned businesses. Tailoring your pitches to each investor can show that you’ve taken the time to research them and create pitches that fit.
Getting ready to pitch
Properly positioning your business through detailed analysis and documentation can greatly increase your chances of getting the funding you need. Closely examining your business from an objective viewpoint can help you see what investors might think of your business.
With the right preparation, you can connect with investors to get the capital you need. It’s a great way to keep your business running – and propel it toward growth.