You poured your heart and soul into your business, and now it’s time to determine how to attract investors and secure funding to continue growing. But how would you fare if investors – like VCs, angel investors, and bankers – were to evaluate your company? What components will drive their decision to invest or not? When you know what to expect, pitching your idea to investors may feel less intimidating and more like, “Let’s see if we’re the right fit.”The process of getting startup funding for your business may put you on edge just a bit— not because you don’t know your company inside and out, but because you’re uncertain what will be asked of you when you meet with potential investors.
We’ve worked with all kinds of entrepreneurs from many industries, and came up with 11 steps that will help you attract investors and get funding for your startup business.
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#1. Develop a Strong Business Plan
Your business plan is an all-important document that proves one thing to investors: that your business is worth their risk. Your plan should clearly outline your business objectives and goals and demonstrate your team’s expertise in your field. Show that you have a deep understanding of your customers (your target market) and provide a complete description of the product or services you offer.
Read: Business Startup Checklist: A Cheatsheet for New Entrepreneurs
An essential section of the business plan is your marketing plan. It defines your market size and growth prospects and should show trend influences and sales potential. Here is where pricing, promotion, and distribution strategies come into play. Talk about barriers to entry as well, addressing how you plan to keep competitors at bay. Finally, make things digestible for everyone by presenting your business plan in an engaging format. Not only does this make you stand out, but your audience may also actually thank you for it.
It’s worth noting that investors already familiar with your industry and market may be more likely to invest in your company because of their expertise and comfort. Note their knowledge may also mean more targeted questions for you, so be prepared to showcase your experience.
#2. Develop a Forecast Model
A transparent, replicable business model that is scalable and as detailed as possible is essential. Show investors that you not only forecasted growth, but you’ve planned for it. Be ready to prove how your business model will help your company become more profitable. Emphasize financial and market issues, as these are vital areas for investors.
A reasonable forecast model is a tool for investors to determine how well you know your market and your presumptive success concerning your market. Your model should be realistic but also show enough revenue and growth to keep investors interested. Just be ready to explain how you’ll achieve your numbers. Consider providing conservative and aggressive forecasts to show alternate assumptions— from more cautious to more optimistic. Remember that forecasting is an ongoing process that requires constant reassessment. The more up-to-date your projections, the better prepared you’ll be to make informed strategic decisions for your business.
#3. Obtain Customer References
Investors want to speak directly with customers who have first-hand experience with your product or services. A conversation with a customer brings a unique perspective about your company that simply cannot be gained through a meeting with you or by reading your company’s marketing materials or website.
Investors are looking to understand the value your business brings to customers, the process your customers went through when deciding to buy, what your customers’ user experience is like, and what differentiates you from competitors. Have customers ready to offer interviews to potential investors when the time comes.
#4. Address IP (if applicable)
Intellectual property, or IP, is more important today for businesses than ever, particularly for technology start-ups and manufacturing firms whose knowledge serves as a sustainable and defensible differentiator for the company. The three types of intellectual property are patents, trademarks, and copyrights. Investors want to see that you know what IP your company needs to protect and how to protect it.
According to the Startup Genome Project, IP has been identified as the critical ingredient for startups worldwide to gain a competitive advantage in the market.
#5. Be Ready to Explain Your Cap Table
A capitalization table (cap table) lays out all the equity and debt ownership and liquidation rankings of the various investors or lenders invested in a business. For investors, a cap table is valuable because it reveals precisely how much of the company’s founders may own.
Investors want to ensure their interests are aligned with the founders, and there is enough equity left over to bring in investors at later rounds. Be forewarned that “founder dilution” can raise a red flag—where cash provided to founders can come on onerous terms.
#6. Explain Your Financial Statements
Your company’s financial statements tell a lot about how you operate your business. In particular, investors care about your cash flow, your debt obligations, and your equity. Having cash in the bank proves you’re prepared for unanticipated problems and that you can capitalize on new opportunities.
Good cash flow (and providing a strong cash flow projection) is a sign of sustainable operations that comforts investors; they trust you can stay outside the “red.” Alternately, debt obligations translate into cash being eaten up in debt payments. Slow months can mean your inability to meet payroll and other expenses. What about equity? Investors are interested in buying stock in your business, so they’ll use your financial statements to calculate your company’s worth to shareholders.
#7. Justify Use of Proceeds (Use of Funds)
Investors want to know precisely how your company plans to use its proceeds. Will you allocate their money to capital expenses? Research and development? Legal and accounting fees? What about recruiting costs and salaries? Establishing capital efficiency early in the process can help your company develop insightful leadership and ultimately make you more attractive to investors. Be prepared to explain to investors what milestones you’re aiming to achieve and the anticipated results.
Read More: How to Instill Financial Discipline in Your Leadership Team
Investors analyzing your company's potential for investment will examine your financial performance from every angle. Let them know how you intend to grow your business quickly using the least amount of their invested cash. Spending wisely should be your objective regardless of economic conditions, so set a track record for sound money management.
#8. Acknowledge Total Address Market and Go-To-Market Strategy
Total addressable market, or TAM, informs investors as to the potential size of your market. How many customers can be reached? How long might it take to become a market leader? Understanding market sizing not only helps in steering your business but also aids in determining your go-to-market strategy. Understanding your TAM will help you make predictions about your market’s true size, how many prospects you can expect, how long your sales pipeline will remain satisfied, and potential revenue for a specified time frame.
Investors want to know how you plan to utilize your resources to reach and deliver value to customers to gain a competitive edge. Fluidity is key—as your market, industry, and business change, so must your strategy. Keep in mind that investors want companies that can grow quickly and manage that growth. You must be able to articulate your TAM to investors and discuss your strategy to achieve it.
#9. Present a Strong Sales Pipeline
There is no business without sales. Investors must be convinced that people are willing to buy your product or services. Your product or service must stand out from what’s already being offered in the market. Your differentiators should be easily definable when explaining the sales process to investors.
Perhaps your competitive advantage lies within your intellectual property, or maybe you’re solving a problem in a new way. Be prepared to prove to investors, using concrete evidence, that your market potential is large enough to warrant an investment. Provide a track record of sales you’ve already made (breaking down the number of prospects at each stage in the buying process) and show how you plan to continue to expand your pipeline to grow the business and make money.
G-Squared Tip: Explain how you’ll “build a moat” around your business, such as using patents or other intellectual property to protect your unique position. Address the intangible elements you’ll use to protect your brand, making it as impenetrable as possible.
#10. Perform Legal Due Diligence
Investors interested in investing in your company will unquestionably have an attorney conduct a complete legal review. The legal due diligence process, while stressful, is essentially the final check on all legal aspects of your business and team. Investors not only gain deeper insight into your company and operations before purchasing, but they also use the information gleaned to help them determine their purchase price.
It’s wise for their legal team and yours to establish a good rapport for the process to run as smoothly as possible. For more on legal due diligence and proper planning, take a look at the article: "What Every Business Owner Needs To Know About Legal Liability".
#11. Provide Management Team Bios & ReferencesInvestors have a keen interest in both you (as the CEO) and the management team—from understanding their industry background to their business experience. They need to feel confident that you and your team can lead the company to growth and make a return on their investment. As “top banana,” your experience matters profoundly to investors. They want to know you have a proven track record for superior performance and expertise and leadership in your industry or previous venture. Ensure you exude confidence and passion and demonstrate your willingness and ability to change course should your company need to shift direction.
Other positive traits investors look for in CEOs are the ability to make decisions with input from your leadership team (there’s no room for indecisiveness), excellent relationship and networking skills, and the ability to build a company around core competencies and deliver on them.
G-Squared Tip: References will likely be contacted to vouch for your team members, as such “outsiders” can provide perspective regarding your team’s talent, track record, and potential for success.
Investors assume risk whenever they invest. An exit opportunity provides them a “reward” for their risky move. It’s therefore imperative to integrate an exit strategy into your business plan. Let investors know how you plan to return their investment (and then some!). Will you pursue an acquisition? Merge with another company? Choose an exit strategy that aligns with your business and personal goals. Your time frame may vary, so think about when you may want to implement your exit strategy as well. The objective is for all parties to exit profitably.
Once your meeting is over, let us know how you did! We’re seasoned in helping entrepreneurs like you lay the rock-solid financial groundwork that investors are looking for when pinpointing businesses for funding. As exhilarating as it is, the fundraising process can be intimidating. But when you’re prepared, you can go in strong and confident—moving you one step closer to achieving your goal. Need help getting your financials in order? Learn more about our CFO and bookkeeping services or schedule a consultation.
Do you have further questions about how to attract investors to your business? Drop us a line by filling out the contact form below. G-Squared provides strategic financial, accounting, and operational expertise to CEOs and entrepreneurs.