Cash is the lifeblood of any business, and at some point, every company is likely to need funding to help it grow. Whether you’re seeking £1million in venture capital or £1,000 from friends or relatives, you’ll need to nail down a few basics before trying to make your case. Here are six things to you must do before approaching investors for any amount of money.
PRESENT A BUSINESS, NOT AN IDEA
Investors hear ideas on a daily basis. While many sound great, they may not be viable. Even a business plan is not enough to attract an investor. You must be a business with a model that scales and a product or service that has “legs”. Even then, you still should prove you know what you are doing.
Ensure you have a strong team in place that can help and support the growth of the organisation.
The big question for nearly every financial backer is: Can you do this? They’ll want to know that you and your co-founders or management team can execute the ambitious plan you’ve presented and pay back your loan or generate a return for your investors.
“Have they done this before and where have they done it?”
Make sure you and your key people can talk about what may be ahead for the business, what the later phases of growth might be, what can go wrong, and how you might handle those things.
Prove the concept and establish income streams or at least demonstrate they are there.
The most important piece of preparation you can do before seeking funding is to know why your product or service will work. The easiest way to prove this is to already have customers using the product / service who can demonstrate it’s worth.
The big reason startups fail is being at the wrong place at the wrong time. People miss out because they think they have the right idea, but do not do the due diligence on the size of market and more importantly the demand for their given product within that market. If you don’t do your homework or understand how your product or service will fit in, then don’t waste your time walking into a VC pitch.
UNDERSTAND THE WEAKNESSES AND GAPS IN THE BUSINESS
Before you ask, you need to know what you are asking for.
Are you getting capital for resources, such as equipment and talent? If so, perhaps you just need a partner that has those resources already and is willing to work based on revenue sharing rather than bringing in an investor just for the capital.
Do you want an investor that brings the capital but who can also serve as a mentor or connector? How involved do you want the investor to be in your business? Most likely, they will want to have some say in the matter because their money is on the line.
Asking these questions and knowing the answers is very important before seeking investment because it will help align the investor with your needs – and raise your chances of success.
KNOW WHAT PRODUCT OR SERVICE TO DEVELOP FIRST
Most entrepreneurs are overflowing with ideas of how to make money. However, sometimes having more than one or two ideas can be dangerous.
Focus on the ideas that are likely to deliver the maximum return possible in the shortest period for you and your investor. Keep it simple, thoroughly research the product or service and ensure that there is a good and viable business opportunity in your idea.
This is neither the time nor the place to invest time and energy in a vanity project.
UNDERSTAND YOUR AUDIENCE
When is the investor likely to want to exit the business? What does that mean to to you and your long term strategy?
Entrepreneurs should do a lot of research and soul searching before deciding what kind of outside money they need and who to approach for it.
Match your business strategy and financial needs to the right backers. For example, if you won’t have strong cash flow for quite a while, then a bank loan probably isn’t for you. And, venture capital investors rely entirely on capital gains to make their money, so if you absolutely don’t want to sell your business, then VC may not be an option either.
Pre-qualify backers the same way you do potential clients, by learning how they do business and what their criteria are. For example, angel investors typically invest relatively small amounts and always worry that their stake in a company could wind up diluted if big investors come in later. Thus, they may avoid companies that are likely to need much bigger follow-on investments.