Prove your worth to investors by showing them how you'll bring in the money.
Q: I am planning on opening an indoor batting cage and retail sporting goods store. The batting cages will help fuel the retail store until it is up and running and well-known. How do I actually figure out how much income I will make on the use of the batting machines? My only research has been looking at other similar businesses that have done well. How can I prove to my investors that I will be as successful as they have been?
A: As I mentioned in "Making Projections," project income by considering how your business actually generates money. Will your customers stop by on impulse or come to you as a destination? If by impulse, how many people pass by your location? How many do you expect to succumb to the lure of the cages? If you're a destination, how do you get the word out, and how many people hear the word and actually come by? Take attendance numbers and multiply by what you expect the typical customer to spend, and you have your income numbers. The exact formulas depend on how you envision the process of acquiring and serving customers.
You'll make many assumptions to produce those income numbers, so investors don't expect the financials to be correct. They know initial estimates may be far from actual business performance. What they'll look for is evidence that you've really thought your business through in detail. They want to know that you understand the assumptions you're making about the business, and that you are smart enough to recognize when the assumptions are wrong and pull your business back onto a profitable track.
One way to demonstrate your thinking is to design the business model thoroughly. If you can say to an investor, "Assuming my ads pull in X people per exposure and they came with an average of Y other people, spending $Z at the retail store each visit," then they know you've thought through customer acquisition and how those customers turn into cash. You can then track X, Y and Z when the business is up and running to make sure you're on track with your projections.
You can go a step further and do a scenario analysis. Ask yourself what happens if your assumptions are wrong. What if ads only pull in half the number of people you initially thought? If you can demonstrate that the business is so good that it still comes out profitable if the assumptions are wildly wrong, that makes a business very compelling to an investor. Even if your business needs to make minimum numbers to survive, having a backup plan if numbers fall short demonstrates you're not relying solely on faith in your assumptions. A scenario analysis would rarely be part of a business plan, but a quick note would almost certainly be appropriate in a slide presentation or conversation with an investor: "This business only needs 10 people a day to be a great business, but in fact, with only two people a day, it can cover all cash costs."
You'll also convince investors you'll be successful by having a team whose members have succeeded in similar businesses. Investors assume they can do it again. The airline JetBlue was founded with $124 million worth of start-up investment, and they were able to raise the money because the founding team had successfully started two other airlines and taken them to profitability.
You'll never prove your success ahead of time. But you can prove your abilities. Show investors you've thought through your assumptions, that you can deal when reality and assumptions diverge, and that you have folks who know the business, and you'll have a strong case that your team can hit that home run.
Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author ofIt Takes a Lot More Than Attitude...to Lead a Stellar Organization, he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com.
This article originally appeared on Entrepreneur.com in 2002.
Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.