WHAT INVESTORS LOOK FOR

WHAT INVESTORS LOOK FOR

Successful entrepreneurs with a proven track record can have as many problems raising finance for their ventures as can the relative novice.

" THE ONLY SCARCE COMMODITIES ARE GOOD IDEAS AND PEOPLE WITH THE ABILITY TO EXPLOIT THEM. "

If you need financing as well as the operational benefits of preparing a business plan, it is important to examine what investors expect from you, if you are to succeed in raising those funds.

It is often said that there is no shortage of money for new and growing businesses. The only scarce commodities are good ideas and people with the ability to exploit them. From the potential entrepreneur's position, this is often hard to believe. One major venture capital firm alone receives several thousand business plans a year. Only 500 or so are examined in any detail, less than 25 are pursued to the negotiating stage, and only six of those are invested in.

To a great extent, the decision whether to proceed beyond an initial reading of the plan will depend on the quality of the business plan used in supporting the investment proposal. The business plan is the ticket of admission giving the entrepreneur a first and often an only chance to impress prospective sources of finance with the quality of the proposal.

It follows from this that, to have any chance at all of getting financial support, your business plan must be the best that can be written, and it must be professionally packaged. The plans that succeed meet all of the following requirements:

A Evidence of Market Orientation Focus

Entrepreneurs must demonstrate that they have recognized the needs of potential customers, rather than simply being infatuated with an innovative idea. Business plans that occupy more space with product descriptions and technical explanations than with explaining how products will be sold and to whom usually get rejected by investors. They suspect, with reason, that these companies are more of an ego trip than a business.

But market orientation is not in itself enough. Financial backers want to sense that entrepreneurs know the one or two things their business can do best and that they are prepared to concentrate on exploiting these opportunities.

Two friends, who eventually founded a successful company, had great difficulty getting backing at first. They were exceptionally talented designers and makers of clothes. They started out making ball gowns, wedding dresses, children's clothes—anything the market wanted. Only when they focused on designing and marketing fashionable maternity clothes was it obvious that they had a winning concept. That strategy built on their strength as designers and their own experiences as mothers, and it exploited a clear market opportunity.

From that point their company made a quantum leap forward. From turning over a couple hundred thousand dollars a year, they soon reached the several-million-dollar league.

B Evidence of Customer Acceptance

Investors like to know that your new product or service will sell and is already being used, even if only on a trial or demonstration basis.

The founder of a company selling software to lawyers for processing relatively standard documents such as wills had little trouble getting support once his product had been tried and approved by a leading firm.

If you are only at the prototype stage, investors have to assess your chances of succeeding with the technology, and they have no way of knowing that your product will appeal to the market. Under these circumstances, you have to show that the problem your innovation seeks to solve is a significant one that a large number of people will pay to avoid.

One inventor came up with a revolutionary toilet system design that, in addition to being extremely thin, used 30 percent less water per flush and had half the number of moving parts of a conventional product, all for no increase in price. Although he had only drawings to show, it was clear that the savings in water costs ensured a sizable market with reasonable certainty.

In addition to evidence of customer acceptance, entrepreneurs need to demonstrate that they know how and to whom their new product or service must be sold and that they have a financially viable means of doing so.

C Proprietary Position

Exclusive rights to a product through patents, copyright, trademark, or a license help reduce the apparent riskiness of a venture in the financial backer's eyes, since these can limit competition, for a while at least.

An inventor held patents on a revolutionary folding bicycle he had designed at college. While no financial institution was prepared to back him in manufacturing the bicycle, funds were readily available to enable him to make production prototypes and then license manufacture to established bicycle makers throughout the world.

However well protected legally a product is, it is marketability and marketing know-how generally that outweigh "patentability" in the success equation. Less than 0.5 percent of the best ideas contained in the US Patent Gazette in the last five years have returned a dime to the inventors.

D Believable Forecasts

Entrepreneurs are naturally optimistic when explaining the future prospects for their businesses. They frequently believe that "the sky's the limit" when it comes to growth, and money (or rather the lack of it) is the only thing that stands between them and their success.

It is true that if you are looking for venture capital, then the providers are also looking for rapid growth. However, remember that investors are dealing with thousands of investment proposals each year and already have money tied up in hundreds of business sectors. It follows, therefore, that they already have a perception of what the accepted financial results and marketing approaches currently are for any sector. Any new company's business plan showing projections that are outside the ranges perceived as acceptable within an industry will raise questions in the investor's mind.

Make your growth forecasts believable; support them with hard facts where possible. If they are on the low side, then approach the more cautious lending banker, rather than venture capitalists. The former often sees a modest forecast as a virtue, lending credibility to the business proposal as a whole.


Copyright Ramon M. Ignacio 2008 All Rights Reserved