What Investors Really Want Forget what you <i>think</i> you know about getting start-up or expansion capital. Here's what investors are looking for.
By Cliff Ennico
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I'm feeling a lot like Sigmund Freud these days. You may recall that people often asked the famous psychiatrist "What does the opposite sex really want?" Since the bursting of the high-tech bubble, people around the country frequently ask me "What do investors really want?"
Let's face a hard fact. Many of the companies that were looking to raise money in the late 1990s were not real businesses. They were ideas--often brilliant ones, but they were not companies. They had not developed, tested or launched their initial product or service. They had no clue (although some had done some market research) whether the consumer would buy what they were offering for sale. They had no revenue or cash flow from operations. And profits? As they say in the Bronx, "Fuhgeddabouddit!"
Wyn Lydecker, a business development consultant based in Darien, Connecticut, helps early-stage companies craft their business plans to attract outside capital. I asked him to share some insights about what's working and not working these days when it comes to attracting outside capital. "We are finding that angels and venture capitalists are only looking seriously at businesses they can understand," says Lydecker. "Investors tend to invest in what they know. They don't have the time or inclination to learn a new industry."
Lydecker reminds business owners to do their homework before asking for money. "Target your pitches to investors who are interested in your business category. If you have invented a new pump for boats, for instance, try to find investors who are yachtsmen or sport fishermen."
Investors are not really interested in how your products work. Believe it or not, most are willing to trust you to work the bugs out. What they want to see, preferably at the beginning of your presentation, is an in-depth knowledge of your marketplace, and how your products and services serve that marketplace. What problems do your products and services solve, and why will people part with their hard-earned money to buy your solution?
They're Investing in You
Next in importance is the strength of your management team. "Investors more than ever want to invest in people," says Lydecker. "And they want to invest in people with a track record. If you are starting a fast food restaurant franchise, does your management team have experience in both fast food and franchising?"
Gaps in the management team are a sure sign that a company is not "ready for prime time." I once performed due diligence on a company that was launching a "community" Web site for stay-at-home mothers. The founders were all former top consumer marketing executives with Rolodexes full of super business contacts. There was only one problem--and it was a big one--the company, which planned to target mothers, had no women on its management team. The company is not around today.
Next, never, ever tell a potential investor you have "no competition." "I wince whenever a client tells me [that]," says Lydecker. "Every business has competition. You have to be honest with yourself about who your competitors are, the likelihood that you will beat them in a fair fight, and the strategies you will use in confronting them."
What about financial projections? "They should be simple and straightforward," he advises. "You should make your projections on a cash basis, and be sure that you've really thought through your assumptions. Investors want to know where your revenue, cost and income projections have come from and how realistic they are."
If you are not sure about this, present your investors with three separate projections under the headings "best case," "worst case" and "our expectations," preferably side by side in columns so the investor can make an easy comparison.
When selling your company to investors, it's helpful to remember the "three Cs" of successful business plans:
2. Competent management: Do your people thoroughly understand the technology and, more important, the market?
3. Cash flow: If you are not making enough money to pay your electric bill each month, don't expect your investors to pay it. It may take longer to generate profits, but revenue (the number of things you sell multiplied by the price per thing) should be sufficient to cover your basic operating expenses and pay you some sort of salary within your first 12 to 18 months in business. Ideally, you should not be talking to investors (other than your partners, friends and family members) until you have reached this point. In business, nothing says "success" better than piles of cash rolling through the door.
Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at cennico@legalcareer.com.
