Setting up and running a new business is an expensive venture. Thanks to changes in the market and unforeseen costs, new business owners quickly realise that they have underestimated how much it will take to get the ball rolling. At this point, entrepreneurs seek financing through traditional business loans, microloans, or cash from friends and family. But what happens if you have already exhausted these resources?
This is where investors come in! However, investors aren’t the answer for every cash-strapped business. Astute investors carefully weigh the pros and cons of investing in a business venture before putting their money on the table. Basically, investors are looking at factors such as start-up’s competitive advantage and growth potential. After all, no one wants to lose their money betting on a dying horse.
Investors Vs loans
Investors are very beneficial to start-ups. Unlike lenders, they won’t be hounding you every month for repayments. The right investors will also double up as business mentors and give you advice and a strong business network that you can draw on.
However, investor money isn’t free money — it comes with some expectations. Bear in mind that investors are very different from lenders. While lenders give you money that they require to pay with interest, investors give you money in exchange for partial ownership of your business. In addition, investors’ money comes with certain restrictions — for example, you might have to get approval for transactions over a certain amount. They might also require you to set up an independent board of directors.
As you seek funding from investors it is, therefore, important to understand why they may not invest in your business. Here are several common reasons you might be losing out on the right investors for your business.
Not a wishy-washy business plan
Can you tell investors where your business will be in a couple of years and support it with credible projections? If you don’t have a strong business plan that outlines this for them, don’t be surprised that they seem hesitant about investing in your start-up.
A business plan shows investors that you take your business seriously. It also demonstrates that you have given serious thought on how to make money, giving them a peace of mind that they are likely to make a return on investment.
Don’t get it wrong — by itself, a business plan won’t snag you an investor. Every investor has multiple opportunities at their disposal and they’re looking for the best ideas and entrepreneurs to back with their money. While a business plan doesn’t guarantee an investment, no investor will give you money without one.
Ensure that your business plan includes elements such as your target market (with data showing why), data-based financial projections, marketing plans and goals, sales channels, a brief competitor analysis, projected timeline on ROI, and potential obstacles you may encounter and how you will deal with them.
The purple cow idea
Just like the general public, investors are unlikely to pay attention to your business if it is selling “the same old” services and products. Let’s face it — the market is saturated with hundreds, if not thousands, of identical products and service providers. If your start-up is offering nothing different, it is unlikely to be a big hit.
Investors are highly selective, preferring new and innovative ideas that give a business a competitive edge. Before you even approach an investor with a request for funding, take a good look at your business to determine what sets you apart from the competition. You don’t have to come up with an innovative product or idea to convince an investor, but they need to know why your product or service is different from or better from what is offered by competitors. You can also show how your business is meeting an unmet need or “gap” in the market. This will also help you to develop your unique value proposition and brand identity.
However, don’t claim to have first mover advantage — especially when it is not true. This can be a turn off to many investors due to its level of risk. First mover advantage is only attractive if you are a big business that is targeting big funders with extensive financial wealth and resources.
Claiming you don’t have competitors in that particular space also has downsides. Unless you can give evidence to the contrary, insisting that you don’t have competitors shows that there’s no market for your product or service or that you haven’t done adequate market research.
Map a clear investment structure
Giving someone part ownership in your business has legal ramifications. Investors want to know that you have considered the possible issues and come up with an investment structure that allows them to buy in without too much friction. What kind of control will they have in your business decisions? What will their money be used for? When can they expect a return on their investments?
They will also need a clear valuation of your business, which backs up your request for a certain amount of money in exchange for a percentage of your business equity. For example, if you are asking for Sh100,000 for a 10 per cent share in ownership, you have to show that your business is worth Sh1 million.
Think and plan on how to handle issues such as change of leadership, closure of business, and distribution of dividends. Investors will also want you to have a clear exit strategy for your business. You have to think about this in advance and include it in your business plan.