Investors are simple folk, it’s all about risk and return. Do you ever gamble? If so, what are the minimum odds before you put your hand in your pocket? The same is true for all investors and the amount they are prepared to invest depends on how they see that risk. The best case is they make a good return, the worst, they’ve lost the lot. So, for the sake of this exercise, forget that your baby is potentially the most profitable company in the world and see it through an investor’s eyes.
Firstly – you. How much experience of managing a growing company do you have? What CVs and qualifications can you provide to support this? Are there any major skills gaps? Similarly with the market and industry; do you really know it inside out, or have you just looked over the wall and thought you saw an opportunity? Please don’t be offended by these questions; this is what an investor will be asking themselves and you must provide the answers. Have a look at Axa Self Investor, for more information on the different investments in terms of risk.
Next, what are you selling and why will people buy it? Not just now, but for the next five years or so. Good market data is essential, with trends and forecasts based on objective analysis. Good businesses know their competition inside out, almost as well as they know their own company and they can clearly articulate their competitive advantage, and how they will protect it.
Now it’s time to look at the numbers. Trading to date, gross and net margins and the state of the balance sheet are numbers that should be tattooed in your subconscious; and because any investor planning to put in a sizeable chunk will carry out ‘due diligence’, honesty is again the best policy.
If you get the investment, what are you going to do with it? Few investors will be happy to put money in to pay off last years debts or to fund owner/managers’ salaries. Product development, marketing, tooling, increasing capacity; these are typically the areas of spend that an investor will see as fuelling future growth.
Finally on the risk side, the investor will want to know what the commitment of you and your key associates is. No matter that you’ve been living on peanuts for the last five years, what is to stop you walking away if the going gets tough, especially if the company’s main assets are all in your head.
Once you can answer all these questions, preferably anticipated in a neatly presented, but not over the top, business plan, you can consider what the investor will want by way of return.
Some look for an income stream, and it will have to be way above what they would get from a ‘safe’ investment, and may stay with you for the duration. Others look for capital growth and may be happy to take no income at all, but they will need an exit route, usually around 3-7 years from investment, to realise those gains. That may mean selling the business if you can’t afford to buy out their share.
Expect to part with a fair chunk of the business, possibly more than 50 per cent if it’s very risky and they are putting up most of the money. If you can accept all of this as good business sense and you can fluently answer all the inevitable questions, then you probably already are investment ready.