Imagine yourself in the shoes of an investor. You are looking for a business with solid potential to provide returns on your money. What do you look for in order to find a business worth investing in and which isn’t destined to fail? Entrepreneur Weekly recently reported that a business has a 25% failure-rate during its first year, 36% in its second year, 44% in its third year, 50% in its fourth year, and 55% in its fifth year. An investor wants to take every measure to reduce the chance of being in that percentage of businesses that fail.
What Do Investors Look For In Small Businesses?
There are numerous groups of investors who are waiting to be asked for their assistance. However, they do not just put their money into anyone who comes to them. They will perform a review and analysis of the investment at hand. More particularly, they look for the following:
You might think, “I am only trying to start up. How do investors expect me to have experience?” At one point, this argument may have held ground. But now, the market is more saturated with small businesses; with owners who have been around the block and know what they are doing.
- Experience can include your knowledge of accounting, planning or pricing, as not having this “know-how” accounts for causing 46% of businesses failures. Furthermore, unbalanced experience or a lack of managerial experience comprises 30% of those businesses that fail.
- In addition, experience can also include having worked for another company or business organization within the same industry as your business. This tells the investor that you already have a realistic idea of the processes within that industry.
The investor needs to trust the person who will be driving the so-called “ship”. Would you let someone who doesn’t do what they say, and doesn’t even have a map, take off with your boat? I don’t think so. They look for distinct qualities in business owners which include responsibility, passion, flexibility and good communication. It is easier said than done, but investors want to see these qualities displayed.
- With passion comes a motivating drive that will power the business through the ups and downs. An investor wants someone truly committed for the long haul. This is displayed through a clear vision of the business, steadfast focus and good energy.
- With responsibility, you hold up your end of the agreement with the investor. You are not complacent and do what you say you will do.
- Flexibility is important to be able to quickly identify problems and have the willingness to change some parts of the plan if the result does not turn out as expected.
- Good communication is key because both parties need to be aware of the state of the business, as well as the direction it needs to go. Important decisions often need to be made urgently. With everyone on the same page, a more focused path can be made toward success. Give your investor a schedule of regular updates you will provide and multiple avenues to communicate with you through.
Quality target customers
Is the business monetized? You would be surprised at how many businesses simply are not structured to make much money, which is a hard sell to an investor. This point needs to be clearly identified, and at the base of the business. Who are the target customers and how much will the business profit from them? The customers are the ones keeping the company in the industry therefore, investors want to make sure that you know whom you are targeting.
Solid business model
It is important for your business model to be thorough, realistic and clearly profitable. Business plans need to have solid evidence to support the product and services, the demand and the plan to supply. They must show profits that will cover all the expenses and miscellaneous costs, while still leaving a good amount for the investors to pocket. A good business model should be:
- expandable (for business growth)
- repeatable (for cycle)
This has to be reiterated — investors want profits! So you need to prove to the investors that your business offers a big opportunity for both them and the customers. Also, the business should have a great impact on the customers’ lives, so that it becomes a habit for them, or a way of life. Think about brands like Apple that people commit to and stick with for many products, over many years.
As an entrepreneur, you never want to approach a business endeavor with a half-heart. You need to put your entire mind, body and heart into it. When you have thoroughly invested yourself into your business, ensure it is profitable, and believe in it, you will have the ammo to attract investors to invest as well. Only when you do so, will you and your lucky invest or reap the fruits of your hard work.