Master these four things before approaching investors.
According to conventional wisdom, investors look for three things before putting money into an emerging business: a huge market, a problem-solving product with early indicators of traction and, above all, a confidence-inspiring team.
While these three points are a good place to start, there are other details that are equally important.
The reality of funding a growing business is much less like the glitz and glamour of “Shark Tank” and more reliant on the details. Often, the process starts with a one-on-one meeting, and it doesn’t escalate to a formal pitch until later.
For those early meetings, as well as for the later, more formal pitches, here are a few less-often-mentioned details that you should have a grasp of before approaching investors.
How to Describe Your Business in One Simple Sentence
This is often called your “elevator pitch” or “wow statement.” It’s crucial to start every meeting, conversation or pitch with a basic, easy-to-understand description of the name of your business and what it does.
This doesn’t have to be dramatic, but it does have to communicate the essence of what you do. For example, “Facebook is an online social network that makes it easy to connect with friends and loved ones.” This doesn’t describe all the details of how Facebook connects people or what makes it so easy, but it does give you the basic gist.
A Basic Understanding of Your Company’s Financial Health
Few people who start a business today have any formal training in finance. That shouldn’t stop you from understanding the details of your particular company’s finances. Before you can understand how much money your business needs to grow, you must first understand the current state of your business.
Different kinds of businesses require different metrics to describe performance. For instance, key performance indicators for a restaurant often look very different from those of a scalable technology-based business, like an app. But you should be able to describe if your business is profitable or not; if it’s not, why it isn’t; and when you project that it will generate profit.
It’s worth investing the time to learn them inside and out. There are few things less confidence-inspiring than a CEO who turns to the CFO for help answering every question having to do with money.
Knowledge of Your ‘Protectable’ Advantages
Every successful business has some competitive advantage—whether that’s a higher degree of quality (such as great customer service), its location or a unique aspect of a product.
Some businesses might even have a differentiator that is so unique, it is worthy of a patent. If this is the case for your business, you need to have that patent application in process, or have a plan to allocate some of the money raised toward beginning that process.
A Defensible Estimate of Your Business’s Value
A consistent sticking point is often the valuation of a business—the amount of money the business is worth in its current state. Reaching an agreement on the valuation of a company is more art than science, and the biggest determining factor is often negotiating skills.
But part of that negotiation is making the best case, grounded in evidence, for what you think a company is worth. This can be extremely technical for early-stage businesses. The Enterprise Center in Johnson County offers regular workshops on establishing a valuation for your early-stage business.
By coming to your next meeting prepared to answer questions about these four aspects of your business, you can set yourself up for success with investors. Even so, you’ll likely be asked a question that you can’t answer. When that happens be honest, not defensive, and take that as an opportunity to follow up with that investor later.