Pitching your idea to investors, regardless if they are bankers, VCs or angels, can be intimidating, so prepare by putting yourself in the investor’s shoes. What do they look for when evaluating your company? Here is a list of the five most important things that an investor wants to know before sinking money in a company.
1. Financial performance. You need to know your numbers. Prove to potential investors that your company has excellent financial performance, especially if you are seeking funding from a bank. Venture capitalists will look for a potential of high returns and a clear exit opportunity.
Prepare to answer questions about the financial stability of your company. Investors will ask if your company shows signs of growth and if you have plans such as issuing shares or borrowing money to stimulate growth. Your debt repayment plan should also be properly presented. Prove your business is capable of handling its financial obligations.
When pitching to investors based on your company’s financial performance, it’s advisable to show proof that your current assets are enough to cover current or short-term liabilities. Expect investors to evaluate your revenue streams, acquisition cost and turnover rates.
2. Background and experience in the industry. Investors don’t want entrepreneurs to make mistakes on their dime. Investors look for experienced entrepreneurs and management teams with a track record of high performance and leadership in the company’s industry or in prior ventures. Most investors will research your business experience and your background in the industry. Passion and commitment should be evident to inspire confidence in investors and stakeholders.
“Investor fit” is particularly important to angel investors compared to venture capital fund managers. Angel investors place great importance on “chemistry” between themselves and the entrepreneur because they generally take a more hands-on approach in the businesses they invest in.
Tim Ferriss, an entrepreneur and angel investor, has mentioned that he looks for founders who have ideally done something high stress when failure or rejection is constant on a small or large scale almost everyday.
3. Company uniqueness. Your product or services need to be unique. Prove to your investors, with concrete evidence, that your market potential is big enough to make investing worthwhile.
Venture capitalists’ are influenced by product characteristics such as proprietary features and competitive advantage. Investors look for features that distinguish you from potential competitors and give you some sort of advantage, such as intellectual property protection, exclusive licenses and exclusive marketing and distribution relationships. (2,3,4)
4. Effective business model. Your company will start to display its strategic value as soon as it begins to generate profits. Present the business model that you are currently using and prove that it will help your company become more profitable.
Different types of investors seek different attributes from a business plan. It’s important to customize your business plan and pitch to each investor. For example, venture capital fund managers and angel investors tend to put more emphasis on both market and finance issues, so those are areas that you should focus on when approaching these types of investors.
5. Large market size. Angel investors typically invest in solutions that address major problems for significantly large target markets. On the other hand, venture capitalists look at market characteristics such as significant growth and limited competition when investing.
The larger and more stable customer base that your brand has, the stronger competitive advantage you will have when pitching to investors. A larger and more stable customer base will serve as proof that your company has a great impact to its target market.
Investors look for companies that can grow quickly and manage this high growth scale. Investors must see that the company can generate significant profits beyond the initial product idea with adequate financial projections and a plan to include multiple sources of revenue.