As you begin winding down your business this year, you might think it’s time to switch off all your faculties to prepare for your much needed rest. But this couldn’t be further from the truth. The end of year is a time to reflect on where you did well and where you could’ve improved. Your shareholders still have their interests tied to your company and profits aren’t going to magically come about through sheer force of will. But you may still need more people to invest in your company. As you close 2016, it’s time look at 2017 as a fresh start and a way to begin finding ways to make your company more attractive to investors.
Who needs investors?
As a business owner, you are obviously aware of the need for investors. But it might be wise to take a few minutes to reflect on this. Businesses seek investors for the same reason any person does: money. By acquiring investors, you are able to use funds to deliver on products or services, ideally netting yourself profits. Of course, there are other options, such as corporate finance. Increasingly, you will find more clients and customers, increase your work and income. Also, the ideal model requires fewer liabilities because profits depend on how much you retain (after liabilities), not how much you earn. By making profits, this benefits you and then benefits the investors. It’s important to remember this when considering what kind of investor you want to approach.
As Entrepreneur magazine notes:
“It helps to understand how the investors you’re pitching will make money for themselves. The formula for paying investors is often not as simple as taking their return on investment and allocating it equally among the key players. For angel funds, venture capital funds and other investment partnerships, there are often complex formulas for how the individuals involved in managing investments make money. You should keep [this] in mind when developing your fundraising approach.”
They then detail what works for different kinds of investors. It’s important to keep this in mind, plotting your business strategy accordingly. But investors seek what anyone would expect them to seek: a business with smart, data-based plans for growth.
But unpacking this is what will lead you to become more attractive to potential investors.
What investors want in a business
You might think it’s easy to outline a plan and deliver it to investors. But, unfortunately, that’s not sufficient. Speaking to Forbes, investor Barbara Corcoran noted how important very human questions were in determining the direction of her investment.
“She gives them what she calls the ‘lifeboat’ test. She asks herself after a few minutes spent with them, ‘Would I want to be in a lifeboat with this person? Do I like them enough to be in a lifeboat with them? Would they go down with me, or throw me overboard to save themselves?’ What is Barbara really saying? She’s saying she better instinctively trust you. She is looking for is an innate sense of trust that she either feels or doesn’t feel by following her instincts. She admits that it’s not an exact science, but she has always regretted not listening to her gut and it’s cost her money.”
The reason for this has to do, says Corcoran, with honesty. While her methodology might seem unscientific, her reasons are sound. No one wants their money going toward individuals who might swindle you. You need to present yourself as trustworthy, able to show facts and be upfront about your issues.
As CEO Ashwin Kamlani notes: “Tell potential investors both sides of the story. While it may be tempting to only focus on the huge potential that your business has in order to generate excitement, it is equally essential to talk about the weaknesses of the business in order to generate confidence. This might sound counter intuitive, but this shows potential investors that you really know your business, you have thought it through and that you are either prepared, or are preparing for potential threats.”
Anyone can find data points and show the growth of their business. You can even hire professionals to do so. Investors know this, so what they seek are those few who are willing to be open and honest about the direction their business could go. No one believes there exists a perfect business. Just as with everything humans do, there will be flaws somewhere. Showing investors you know where these flaws are doesn’t undermine your business – it shows them you are aware of the flaws and you believe things will work regardless. Or, better yet, you’ve shown them how you can work through the flaws (ideally, to solve them).
The other important element investors find attractive are those dynamics that put your business over the edge. That is, what about you or your business gives you a competitive edge? Why you and not your competition? Figuring this out should be key to all your business plans, of course, but it must be given full force when you present it to investors.
In 2017, investors want to see more honesty and, as the market grows, competitive edge that benefits them. Investors don’t necessarily have to understand every aspect of your goals or strategy, but you need to show them why your business and why you, personally, are the right choice for their investment.