A startup could evolve into a larger company by being acquired, opening more than one office, generating high revenues or having hundreds of employees, but not without access to funding. In reality, however, startups are vulnerable to risks as only 10% of startups around the globe are successful each year and less than 50% survive after five years.
Beyond the business nous, managerial discipline and other necessary infrastructure required for startups to transmute into successful businesses, there is usually the challenge of access to funds, especially the initial funding.
According to CBInsights, 29% of small businesses fail because they run out of finance.
Founders of startups are always eager to understand the thoughts of the investors when the opportunity comes to have the latter across the table, however, there are certain criteria startups should meet that generally determine if the investment is bankable or not. I’ll be sharing some tips to equip you with operational strategies that would make your business bankable and appealing to investors.
Most people simply don’t invest enough time and energy into getting their ducks in a row to secure proper financing. There is no better way to prepare than developing a business plan.
Guy Kawasaki, a Californian speaker and investor who writes about business plans, start-ups and investing, suggests starting with ‘The Grab’. Here, the idea is to start with a compelling sentence or two that sums up your unique solutions to a big problem that should be direct and specific. This problem should be described in one or two sentences, with numbers to back up your statement, subsequently, explain your Unique Value Proposition (UVP).
Potential investors want to know about the market where your startup operates. Is it growing? What is driving that growth? Which segments will you be targeting? To show how profitable your business enterprise could be, you should also provide an overview of the competitive landscape. Who else is operating in the space? Why are you different? What is your unfair advantage (patent, people, first-mover)?
Convey the nature of the market opportunity you address with your business or product by highlighting what is “broken” or “not working.” If possible, scope out the size of the market opportunity.
How will you make money? Is it a subscription model? And in the case of products, are you buying goods for X and selling them at Y? Will you be offering a free service and selling advertising? Are you targeting companies or individual consumers? Do you have distributors? How will you find and reach your customers? How will you scale? What are your key costs? No need to get into the details of your operation, technology and/or marketing plans, but you might want to touch on any really important piece of information in your business plan.
Don’t just say you will make money, in the business model section of your business plan, explain the how.
Letting investors in on the evolution of your company can show progressiveness either you have made a profit or not.
Genuine answers to following questions would tell if you truly have a history that supports the anticipated funding- What have you achieved so far? Do you have a product or at least a prototype? How many units of your product/service/prototype have you sold to real customers? At what price? Do you have larger customers ready to buy from you – letters of interest? Have you received any endorsements?
If you don’t have hands-on experience in that business, most investors wouldn’t commit funds to such businesses.
This framework facilitates the analysis of transactions for income, outlays, capital accumulation, and financing. A clear financial account system outlines the main classifications of revenues and expenditures and the overall deficit and profits of your startup.
According to Samia Msadek, Director, Governance Global Practice, World Bank, reliable and transparent financial information contributes to the efficient allocation and management of resources and helps companies attract investment and access credit.
A good accounting system makes any business attractive to funding generally. Some financial experts draw an analogy between a business financial record and a beautiful bride in a bid to attract investors.
Maryesther Ezeadi, the Business Development and Relationship Manager at Development Bank of Nigeria (DBN) subscribes to this school of thought.
“At a typical wedding, everybody is about the bride, that is how you must prepare the financial books of your business to attract investors attention”, she told MMS Plus.
This is also a good place to state what kind of funding you’re seeking- start-up capital, early-stage capital or growth capital. If you’re to appear before an investor, provide a snapshot of your financials. If you are asking for capital, spell out how much you need, what you will spend it on, and when you will be able to deliver a return. How much revenue do you expect to generate within 5 years? When do you expect to break even? If you are seeking outside capital, you will need to show either that you can pay back a loan (plus interest), or if you are seeking equity investment, you need to show convincingly that you can grow to a point where you can provide a return to your investors.
Investors are also concerned about the visioners and founders of the businesses. As a founder, the burden of allaying these fears rests solely on you. Investors want to support CEOs with a track record of past projects and positions that demonstrate an understanding of the market and a penchant for excellence and innovation.
Let’s take a cue from the founder of Virgin Group, Sir Richard Branson, a leader who puts his employees first and overcame early failures to operate more than 400 companies in various fields. Branson certainly failed over the years- remember Virgin Cola? Or even Virgin Brides (with Branson donning a wedding gown for publicity?) How about Virgin Pulse and Virgin Digital -which couldn’t stand up to Apple’s iPod and iTunes?
Here’s Branson on failing for success:
“We’ve never been 100% sure that any of the businesses we’ve started at Virgin were going to be successful. But over 45 years, we’ve always stood by our motto: ‘Screw it, let’s do it.’ Do not be embarrassed by your failures, learn from them and start again. Making mistakes and experiencing setbacks is part of the DNA of every successful entrepreneur, and I am no exception.”
For Branson, the leaders employed to run his Virgin companies are the very same people responsible for inspiring and motivating the workforce, not just organizing and monitoring employee productivity. Therefore, as a business owner, you must be able to continuously inspire and motivate your workforce and this trait should be evident when you engage investors.
Some inspiring stats about Branson; his education was short, he was a high school dropout who acquired his business success without a university degree. Nevertheless, his ambition and entrepreneurial spirit were always evident even at a young age. As an entrepreneur, you must prioritize personal development. Leadership is key and your ability to tell a compelling story that sells the vision, product and people behind your startup is another key determinant in your quest for funding. As you make your presentation, investors will also be looking out for life experiences and business projections that show that you are driven, innovative and disruptive.
Most potential investors are interested in your organizational structure and this gives you room to explain why your team is best placed to win. Where does each person on the core management team fit in? Have you covered all the key roles and skills?
Be specific- if you have a great idea for mobile advertising business, and your chief marketing officer was previously head of advertising sales at a multinational like MTN, then say so!
On a smaller scale- if someone on your team has great relationships and connections in the community where you operate, then say so.
The personnel in every organization determines the wealth of that organization. The employees, even in small businesses go a long way to determine success or failure. Hence, the need for training on customer service and recruiting people with the right skill-sets for various positions.
Get a strong support system
Successful startups can attract a strong board that buys into their vision and provides strategic advice on several issues. Potential investors are often swayed by the composition and depth of your board. It not only gives you extra credibility but also reflects your willingness to take advice from experts and mentors who have veteran experience.
Above all, a strong board also demonstrates a great relationship with stakeholders and institutions in your target market. The Harvard Business Review in a survey from alumni who lead venture capital-backed technology startups places the ability to build a great support system; managing a board, choosing advisors, recruiting co-founders, at the top of skills aspiring founders should prioritize. It is pertinent that your startup ticks these boxes and redefines what makes your business attractive to investors as the enterprise grows. This is a lifelong process for every founder but it is one that gets easier with sustained efforts, support from mentors and willingness to keep learning.
What Investors want
As varying as investors’ interests are, based on the stage of growth that interests them, 3 recurring factors they care about are: the people behind an idea, the idea itself and an answer to the question: How do I make a profit on this investment?
If you are three-for-three in terms of offering investors what they’re looking for, it means you’ll have a real business plan with cash flows, specific Return on Investment (ROI) projections and a true understanding of your market.
The challenge of finance is a huge one confronting startups around the world and there is no precise formula that forces the arms of investors. The business environment also varies from one nation to another as fiscal policies, availability of low-interest loans, investment and development banks, varying markets, basic infrastructure like transport, connectivity and power supply, among others determine the success of most businesses; but the right application of these guidelines would address most of the concerns investors have.
You may not have adequate infrastructure to support your business and there could be policies and multiple taxations threatening your start-up, these are external factors you have no control over, but you should choose to be resilient, work on your financial books, improve yourself and your employees, get a business plan and make your business attractive to funding.
If you want serious investors, be a serious investment.