Finding investors, especially when your business is still very new, is hard. While you might be convinced that your business is going to be a long-term success, investors tend to be, well, a tad more sceptical.
Their scepticism is understandable, of course. Most start-ups fail. Even at the best of times, investing in a brand-new venture is risky. There are almost never any guarantees. Also, remember that investors aren’t looking for the sort of returns they could get by sticking their cash in a savings account. They want a real ROI — the much-vaunted 10x return.
So, how do you convince a VC to invest in your business? If you want an investor to take you seriously, you need to be able to show the following when presenting at a pitch meeting.
1Know Your Numbers
Don’t even think of pitching to an investor unless you have a very thorough understanding of your business’s numbers.
“It’s very important to understand the basic operating metrics of the business. I don’t expect entrepreneurs to memorise a 36-month plan, but they need to understand the production costs, margins, overheads and cash flow cycles of a business. A lack of understanding of the basics will put off any investor,” says Shark Tank investor Vinny Lingham.
You need, at the very least, to have a basic understanding of what your costs will be, and how much revenue you could potentially generate. If you can’t offer this, no investor will ever give you their money.
Also, it’s important to be realistic. Sure, investors like to see aggressive growth projections, but only if these are actually attainable. Don’t talk about the total potential global market for your product, and don’t discuss international data that has little local relevance. Investors are sick of hearing about the billions of potential customers out there. Stick to the customers you can actually attract in the next year or two.
As the saying goes: under-promise and over-deliver. Do your homework carefully, and then provide an optimistic yet realistic picture of your business’s immediate future.
It is incredibly unlikely that anyone will invest in your business if it is no more than an idea in your head. Even if your business is still very new, investors will expect you to show at least some traction.
If you’ve been watching the local version of Shark Tank, you will have seen a prime example of this: entrepreneurs asking for money before they’ve actually spoken to customers and proven their business model.
Responding to a couple of entrepreneurs pitching a 3D printing consultancy, investor Marnus Broodryk said the following: “My problem with aspiring entrepreneurs in South Africa in general is that they’ve got an idea or concept, and they expect investors to come onboard at massive numbers. They give businesses an evaluation of millions, but they don’t have anything more than a concept. That expectation is totally warped. If you want a business, you need traction. If you’ve got interested clients and signed orders, that’s a business.”
Don’t ask for money until you’ve shown that your idea has real potential. Ideally, you should already be signing clients and making money. If not, you need to show convincingly that there is demand for your product or service. You want to illustrate that you are solving a burning problem, and that the only obstacle between you and large-scale success is a lack of funds. It’s okay to start small. It’s even okay if you’re not profitable yet, but show some sort of traction in the market. You need to be able to point to actual customers and companies that are willing to do business with you.
“Traction really is about product/market fit — meaning, does the market want your product and is it willing to prove this by paying for it? If you have paying customers, that’s great, but if they are coming back for more, that’s even better,” says Lingham.
3Show That You Can Scale
All scalable businesses are successful, but not all successful businesses are scalable. Just because your business is doing relatively well, don’t assume that it is the sort of business that will attract investors.
As mentioned earlier, investors aren’t looking for a decent ROI — they’re looking for an exceptional one. Offering them a 20% return over five years is not enough.
You might have a solid business, but if it isn’t scalable, it won’t attract investors.
The very first pitch on the local iteration of Shark Tank was a great example. The entrepreneur was selling chocolate printing for special events, such as weddings and corporate functions. Within seconds, a logo or other image could be printed on a plate in chocolate. It was a clever idea, but simply too niche to ever scale successfully. This business requires you to be on the ground, printing chocolate images one plate at a time. How do you scale that quickly and effectively?
“You’re going to do well out of this, and you’re going to make a good living out of it. Do I think you’re going to shoot the lights out? Probably not,” said Gil Oved after the pitch. “Is it an investible business? Is this going to be my 10x? I’m thinking, how do I take something that’s here and make it pan-African, global? Is this that business? No.”
Before you ask for investment, you need to figure out how you could successfully scale your business. Look at Facebook, Uber or Dropbox. These tech companies are very scalable because the marginal cost associated with a new user is incredibly small. A consultancy, in contrast, requires experienced (and expensive) employees, and is therefore not nearly as scalable.
“Consulting businesses are typically not investible businesses, because to scale them you need to output more hours, and that takes more people. That’s not the kind of investments I ever want to get involved in,” says Lingham. “A scalable business means that the more you sell, the lower your costs become. If you have to keep hiring people in order to make more money, your business is really not that scalable.”
4Have A Defensible Position
Facebook was not the first social networking site. Google was not the first web browser. Apple was not the first company to envision a computer for the home. While being first to market can certainly be very advantageous, it by no means guarantees success. There are plenty of examples of companies that succeeded by taking an existing idea and making it better.
So, as a start-up founder, you need to show investors that your idea can’t simply be replicated by someone else. It’s not just about your idea — it’s about you. If you’re not crucial to the success of the idea, you have a problem.
Modern technology has made it possible for start-ups to compete with large companies, but it has also made it much easier for competitors to take your idea and run with it. If you launch your business today and it’s a hit, you can be sure that someone will be imitating you within a year. How do you protect yourself against this?
It could be about IP protection, but even this is often not enough. More often it’s about carving out a unique position that makes it hard for others to compete — it’s about the systems, processes, expertise and partnerships you have that others don’t. You need a formula for success that can’t simply be replicated by someone else.