In last month’s article, the discussion involved a few of the most common ways for an entrepreneur or small business owner to obtain the desired financing. This month’s article will take a more in-depth look at some of those processes and what is required of the entrepreneur or business owner to go through them.
Much of the time, the entrepreneurs’ first concern when looking for funding is whether or not their ideas or businesses is what investors are looking for. Or in other words, how to make their ideas investor-worthy. It goes without saying that in order to market your idea effectively, you need to know your audience. Typically a venture capital firm (VC) or an angel investor will be looking for specific qualities or traits amongst their many applicants. As such, it is key to conduct the maximum amount of research possible in an effort to learn all there is to know about the VC or investor, to be able to market your request in a way that matches what they are seeking.
Often, many investors say that when first being introduced to a business idea, they know within the first few minutes if they are not interested in making the investment; and within the first hour whether they are interested in investing their money. So what factors are crucial to satisfy the initial checklist?
1. Demonstrating your plan for reaching a massive audience: although your business is considered “small”, you’re still expected to think “big” in terms of distribution. Amongst all the ideas that consumers are exposed to, the investor will want to know how you plan to make your voice heard. In Reid Hoffman’s words, CEO and founder of LinkedIn: “How does a company rise above the noise to attract massive discovery and adoption? YouTube did it through existing channels like MySpace, which already reached millions. Yelp had strong SEO, which found them a mass audience searching for restaurants and nightlife. Facebook’s University-centric approach landed them 80% adoption across a campus within 60 days of launch. Every entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users.”
2. Showing your unique value proposition: the marketing world is crowded – even more so on the Internet. Thousands of new good ideas are posted on hundreds of thousands of website every month; an investor will want to know how your idea is different and will stand out – i.e. what makes you/your idea unique. You want your idea to be innovative enough to stand out, but not too out of touch with reality that you might alienate the end user. Most often, some of the best businesses are an inventive and creative spin-off of an existing idea. Google revolutionized Internet searching, at a time that AOL and Yahoo had seemingly sated that market.
3. Proving your business capital to be efficient: even though you have an excellent idea and a foolproof marketing strategy, the investor will want to know how reliable your idea is over time from a funding perspective. Although the initial seed funding is important, later financing must also be reliable, i.e. your product must scale intelligently. For example, a well coded website that is set up properly can grow from 10 users to 1 million users without requiring much in continuous funding as a company that delivers groceries to users – growing from 10 users a day requiring 1 van and driver, to a million users a day… you do the math.
Apart from those specific qualities, investors will typically require a standard package from the entrepreneur detailing information that is considered necessary for them to make the decision whether or not to invest in you/your business. Often, amongst other things, this is called a Memorandum of Investment, or an Investors’ Memo. This is a very detailed compilation of documents that will give the investor an inside-out understanding of your business. It may be difficult to put this together without having already conducted a market/feasibility study and developed a business plan. If your business is established, you’ll also need organized and documented financials. Some typical sections you’ll see in an Investor’s Memo are the following:
1. Introduction/executive summary: this part shouldn’t be more than a page long. Here you should summarize the opportunity; more detail will come in other sections of the Memo. It should include a business summary (introduction to your idea), the proposed financing (what you’re asking for), the main reasons to invest in your idea, the key risks associated with your investment, and the general goals you plan to meet through the investment.
2. Market opportunity: this section explains how big the potential market is, and how and where your idea fits into it. It can include the problems that need to be addressed in this regard, your value proposition (see above), and details of your competition (discuss in depth the competitive setting as it is now and in the future – and how your idea/company falls compared to it).
3. Product: explain your product in detail; what it is; who is buying it; why they are buying it; any intellectual property rights; how much research and development is needed for your product; the product’s timeline and potential roadmap; price points and margins; costs and means of delivering the product.
4. Sales/marketing strategy: pinpoint your ideal customer – who they are, how to reach them. Discuss the cost of marketing through different channels, the sales process timeline, and how your marketing strategy fits into the market analysis you conducted.
5. The team/management: this section is important. The people running the show can either make it or break it. Include a lot of detail on each person involved in managing the business or potential business, including yourself.
6. Operational plan: quarterly or monthly burn rates, historical financials, the companies use of funds, the revenue plan, the associated margins, and staffing plans and needs from a cost perspective.
7. Long-term financing plans: this will include a milestone plan to achieve through the desired funding, total amount of capital needed for the business to become self sustained, etc.
These points are some of many issues an investor will want to know about when taking a more serious look at your Memo. What is key above all else is to dedicate the time and effort into being well prepared for anything the investor may need.