Bringing in outside investors is a huge step in the life of a small business owner. You may only get one chance to influence a potential investor – so don’t blow it by being unprepared.
Investors tend to be more interested in competent and capable businesses where balanced teams are turning ideas into commercially viable products or services. Ideas come and go, but businesses that have begun to progress them into reality are better placed to attract investment.
Before you approach investors with your opportunity, make sure your business is appealing, so it stands out from the crowd.
You can contact some organisations to help prepare your business for investment, including:
- Australian Private Equity & Venture Capital Association Limited
- Business Angels
- an ANZ Small Business Specialist.
Research your target investor
It pays to know a little about your target investor before attempting a pitch. Have they invested in similar businesses in the past? Do they have a track record of staying the distance? What kind of return might they expect from your venture? And what kind of investor are they?
Angel investors usually provide capital to business start-ups in return for convertible debt or ownership equity. They’re often retired entrepreneurs or successful business owners themselves, and can be a valuable source of business advice and mentoring.
The Australian Association of Angel Investors has more information on how angel investment works.
This is the collection of financial backing from a group of investors, generally carried out online. By having a large group of investors you may gain greater publicity and access to potential marketing tools, but run the risk of compromising your intellectual property. The Australian Government’s principal business resource has more information on crowdfunding.
Venture capitalists are professional managers who invest other people’s money. They look for potential high rates of return and normally require a controlling share of the business.
Features of an attractive business
To get started, weigh up the stronger and weaker parts of your business and think about what you can improve before approaching investors.
It helps if you can demonstrate:
- a well developed business plan with accurate financial statements and realistic forecasts
- your own time and money committed to the business
- evidence of innovation and creativity in generating revenue streams for your business
- determination, persistence and total dedication to your venture
- relevant market research
- a track record of sales success at sensible prices
- fitting distribution methods where each part of the chain receives a margin
- potential to grow quickly in a market where you have a sustainable competitive advantage
- high barriers to entry for competitors and a low risk of changes, making your offer redundant
- a balanced team that can continue to grow
- incentives to retain quality staff
- awareness of skill areas your business lacks, such as marketing or finance
- intellectual property (IP) that’s protected for the foreseeable future.
What investors are looking for
Potential investors will have specific requests when they look deeper into your proposal.
Do you have financial records going back a minimum of three years? Having your accounts professionally audited by a reputable accountant will add weight to your figures.
If you have outstanding debt or lucrative contracts that are coming to an end, document them clearly. They may make investors cautious, but by having nothing to hide, investors are unlikely to lose confidence in the opportunity.
Have a confidentially agreement drawn up that keeps your discussions private to provide both you and your investor with an added layer of security.
Paperwork. It’s important for an investor to see that everything is in order, so make copies of all your relevant documents. The most important documents an investor might want to see include:
- permits or licenses
- tax records
- company formation documents
Outline your plans
Strategy for sharing ownership
You’ll need to demonstrate to potential new partners that you can and will share business control. Make a plan covering the equity split that investors can expect from any investment.
Have a backup plan
If anything happens to you, how will your business keep running smoothly? Be clear who’s next in line and be sure your staff know your business really well.
Record your spending
Investors will want to know exactly how their investment will be spent. Outline how much you need and how you’ll use it to push the business forward, rather than service debt or pay wages.