Investment is a key component of growth for many small businesses however attracting investment can be challenging unless entrepreneurs understand exactly what investors require and adequately prepare themselves.
Consider the difference between a lifestyle business and a business set up for sale or investment. Is the business merely sustaining the owner’s lifestyle or is it driven by ambitious growth plans and financial gain? Is the business fit for purpose? Does it provide critical problem-solving for customers or is it just a luxury purchase?
In determining whether a business is investable, investors will evaluate whether there is value in the business domain name, whether it has intellectual property rights, whether there is a strong senior management team and whether there is a simple ownership structure.
Consideration will be given to whether the business proposition represents an incremental change in an established field rather than the re-education of the consumer, whether the investor can get an exit in the next three to five years, whether they can get some return on the revenue within the next 12 months and whether or not 15% of the profits are given to incentivise key employees.
Among the factors which are likely to put people off investing are situations where too many family members are involved in the business. Investors will look to see if the owner has drive or passion, whether they are confident and whether there is a big enough market for the business concept.
When trying to attract investors, do not go for the scatter-gun approach. To find a suitable investor, do your research and approach them directly. If you identify too many potential investors, they may all come back with questions and you must consider whether you’ll have enough time to prepare your response.
When you have attracted investment, do not give away equity. Instead, create preference shares as a more elegant way of maintaining control of the business.