Thanks to media coverage and TV shows like Shark Tank and Silicon Valley, “finding an investor” has suddenly become the first instinct for how entrepreneurs plan to fund their new business. Expenses seemingly don’t matter because there’s free money for everyone with an idea, right? Wrong. We hear people use the phrase “I’ll just find an investor” so casually that it’s almost like they’re saying it’s on their to do list along with grabbing milk and coffee filters on the way home.
Let’s step back a moment and understand who these elusive investors are. In a general sense, an investor is someone who plans to make money by putting their existing money into things that grow. That could be stocks, mutual funds, real estate, businesses, or any number of things. Good investors understand risk very well. To come out on top, they either put a lot of money in a few things that are definitely going to grow, even if minimally, or they spread their money a bit thinner among higher risks that could either lose money or grow massively in hopes that the gains outweigh the losses.
Business investors don’t just hand out money willy-nilly to anyone who asks, though. They aren’t philanthropists; they’re looking to make a profit. There’s no guaranteed way to get an investor, but there are some proven ways to set yourself up for the best chances possible.
One of the best ways to make a case for your company being valuable is to have consistent customers. A solid audience can make up for a variety of other aspects of your business the investor may not agree with. Even if you’re giving away your product or service for free, any investor’s ears will perk up if you have a large, stable customer base. Ten thousand customers who aren’t paying a dime are worth far more than 100 customers who paid $100 once.
2. Sustainable Revenue
Yes, we just said even customers who aren’t paying anything are valuable, but your company must have an avenue to establish consistent, growing revenue. A one-time fee (for example, paying to download an app) is not sustainable revenue. Those customers pay once and never pay again. That means in order to grow, you must exponentially increase new customer acquisition, and if you ever slow down on new customer acquisition, your revenue will slow down as well. Monetization channels that allow you to create recurring payments among loyal customers are far more profitable. Examples of these are subscriptions and service fees. Investors want to see a predictable monthly revenue that grows as your customer base grows.
3. Understanding of Valuation and Equity
When you ask an investor for a certain amount of money in exchange for a certain amount of equity, you’re making a statement about how valuable your company is. If you ask for $250,000 and only offer up 25 percent ownership of your company, you are essentially saying your idea is worth $1 million. That’s a pretty bold assumption to make, and depending on the numbers, could make you look really ignorant. Be ready to back up your ask with solid financial predictions.
Investors will find a balance between the amount they’ll offer and the equity they’ll take in return that matches the riskiness of your business. If your idea has a strong likelihood it won’t work out, they may ask for controlling interest, which is more than 50 percent. Only take a deal like this if you’re ready to hand over the reins for your idea. The other equally-scary option is they offer to buy in at 49 percent, which leaves you the majority owner, but if you take on any more investors, you’re suddenly a minority share owner.
4. Quality Team Members
Investors aren’t interested in just your idea; they’re interested in you. Do you have what it takes to make this business work and deliver a return on their money? Bringing on an investor when you’re a one-man or one-woman show means they’ll have a say in your future team members. If you already have a partner, make sure they’re committed and trustworthy. A potential investor will want to know their qualifications as well as yours. A great idea is worth nothing if an investor has no faith in your ability to execute.
On the flip side, what are major red flags that send investors running for the hills?
- No customers
- No reasonable channels for revenue
- Ridiculous expectations regarding how much money you want
- A risky or uncommitted team
As a result, Bob with an app idea that hasn’t been built yet and no team, who is blindly asking for $300,000, is going to get shooed out of every firm he approaches. Sue, who has a prototype app with 5,000 regular users and a proven business partner, can likely secure a nice check for the amount she needs to grow her app to the next level.
Do your homework before approaching investors. Have a firm plan for how you are going to make an investor’s money grow. Understand landing an investor is ultimately a business interaction, and unless it makes good business sense for both you as founder and the investor as partner, never impulsively accept an offer.