Down to Business is a weekly small business advice column featured in The World Newspaper, originally published online by the Oregon Small Business Development Center Network, and republished here with permission.
Q: What are investors looking for?
Simply put, investors are looking for a high return on their money; they want to be compensated for the risk they are taking. They also realize this might take a few years. Regardless, they’ll want to see the exit strategy before they invest. Investors will analyze your business and financials to determine such things as probability of success, your management team experience, cost of doing business, pricing of the product or service, margin on sales, market penetration and demand, and thorough marketing plan.
Strong management is very important in any successful business. Investors will always want to spend time with the key management to assess knowledge, experience, leadership ability and understanding of the market need including how the products or services meet that market need. If the key personnel lack experience or background in a certain area, the business plan should show how those deficiencies will be addressed. Often investors will want to be part of the team, either on the Board of Directors or working closely with management. Generally they will want a substantial ownership interest in the business venture.
Financial projections will show how you expect to run the money side of the business and allows investors to decide if your projections—both expense and revenue—are realistic. A well-researched business plan and financials will certainly help in this area. Remember, the investor is looking for a better return on this investment than they can get in the stock market, so the financial projections need to give them a sense that this is possible.
Pricing and margin work together. You must analyze what it costs to produce the product and then price it accordingly to make a reasonable profit. Don’t forget to figure in fixed costs of the business operation when determining your margin. Obviously, volume has some bearing on how the revenues will eventually exceed expenses.
Market penetration and demand might very well be one of the most important items in getting a business started or even taking it to the next level. If your product is totally unique, you have a much better chance to make it. If you have entered a field in which there are several other companies doing the same thing or something very similar, you must have a strategy that will make your product or service different in some way.
Bottom line is that the investor is going to want to learn as much as possible about your business and you. The easier you make it for them, the better chance you have of taking on a financial partner to help you grow your business to the next level.
If you have a small business question for Arlene, you can reach her at email@example.com.