What Goes on in Investor’s Mind? Part 5
The process of fundraising is never easy, but it also holds the key to your startup’s next phase of growth. Investors want to see that the company has the potential to be successful in the long term, which means they should know the cost of producing each product and the estimated time it will take to reach said production (along with the costs involved at each stage). And while investors could be watching every move you make from afar, they're still excited about investing in your company and will likely have a lot of questions for you during the process.
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Selling Your Idea to Investors
Selling your idea to investors is a tricky process. It requires a lot of preparation and forethought, otherwise, it could end in disaster. There are many ways to sell your idea, here are some important ways to do it:
1. Make sure you’re clear on how much money you need to raise- Investors want to see a plan that shows how you’re going to get your idea off the ground, what it will be used for, and how much money you’re looking to raise.
2. Write a business plan - The important step in the process is to create a well-written business plan. This document will outline your vision for the company, how you plan to achieve it and why it’s worth investing in.
3. Build an MVP (minimal viable product)- It’s not just about being able to build something useful; it’s about proving that there will be enough people using it (and paying for it) to make it worth building in the first place.
4. Present your idea in person- When pitching your idea to investors, you should always be prepared with an explanation of how exactly you plan on using the funds raised by selling shares of your company stock. This way they can see that there's enough information behind why they should invest their hard-earned money into your company.
5. Get feedback- You should also get some feedback from other people who know about your ideas, such as friends and family. They can help you see if any negative questions could scare investors away.
Founders should consider the following things:
• Technology • Operations • Resources • Data
Technology- Consider these questions, how will the technology work? What kind of data can be collected and analyzed? Is it possible to make a prototype or working model that demonstrates the product's functionality?
Operations – Consider these questions, how will operations work? What are the costs involved in running the business, and how do they compare to other similar businesses in your industry? What happens if there is downtime or if something breaks? Will repairs need to be made as well as replacements on equipment? If there are multiple locations, how will they all be able to operate without affecting one another?
Resources- Investors want to know what it will take to execute your plan, so make sure you have the people and money needed for that execution.
Consider these questions, what resources must be put aside for this business to succeed (money, manpower, equipment)? How much money will be needed up front and what percentage of revenue do you think it will generate each month? How many employees do you expect to hire over time?
Data - The most valuable resource is data knowing where you stand, what challenges you face, and what risks could affect the company. Gather all the information about the idea that you can. The more information you have, the easier it will be for investors to make an informed decision.
Companies that succeed with investors' money are those that have been able to prove their business model works by collecting and analyzing data from the market at large. Investors love this kind of data because it shows them how well their investment is performing in real-time—and they're much more likely to reward success.
Investors consider the following things:
• Revenue • Expenses • Assumptions • RoI
Revenue – Investors want to know that the plan isn’t just an idea — it’s a real business with revenue streams, cash flow projections, and a clear path forward.
Consider these questions, what are the revenues generated by your product or service? How much revenue have you generated in previous years? What percentage of that total did your product or service account for? How much will it account for going forward? How much profit do you expect from this business? These figures should be easy to understand – so make sure they are expressed in dollars and cents (e.g., $10k per month).
Expenses – A business needs a large initial investment, but it also needs ongoing costs and expenses. These include wages, rent, utilities, and so on. Investors will look at what your business will cost to set up and run. They’ll check whether you have enough money in the bank to cover these costs and whether you can pay them back within a reasonable timeframe.
Investors will also look at the cost of hiring people and buying materials. How much will the company spend on development? This includes travel costs and other overhead expenses. They want to know how much money you will need to make back on your investment, as well as what it will cost to get started. What is the cost of running this business, including salaries?
Assumptions - Investors will want to know if you've done your research about how much money you need to make and what the return on investment (ROI) will be for each investor. You should also include a discussion about whether there is any volatility in the market that could affect your ROI.
Investors would like to see assumptions about your market and the competition that you are planning on entering. They want to know that your numbers are realistic and won’t be overly optimistic or pessimistic. Consider this question, what assumptions are you making about the market?
What assumptions do you have about the growth rate of your business? What assumptions underpin your forecasts and how confident you are that these will hold? If your forecasts are based on a particular industry or market sector, then those assumptions need to be supported by evidence or data – for example, recent sales or market research figures. If they’re not, then investors may discount them heavily in their calculations.
RoI - Your business plan needs to be carefully crafted so that investors can clearly understand how much money they will receive from their investment and how long it will take for them to see a return on their investment. How much capital do you need to cover costs and make an acceptable profit?
Conclusion
You need to be able to convince your investors that not only will you be able to deliver on your initial pitches, but you'll also be able to take the business and the idea further. They are more likely to offer better feedback and advice than personal acquaintances may be willing or able to give. Investors would rather fund a proven entrepreneur than an idea or a person with a nice PowerPoint presentation.