Convincing angel investors to invest in early stage ventures is tough – really tough.
Research published in 2011 suggests that just 2.5% of business plans presented to Business Angels Networks go on to win funding. The above statistic is daunting but knowing how to tailor your business plan to investors will significantly improve your chances.
Whilst every investor is different I’ve attempted to list the 6 most common things that angels look for in a business opportunity based on my experience of speaking to network fund managers and private investors.
It goes without saying that the business idea needs to be good but how do investors assess the strength of an idea? Whilst “good” is a matter of opinion, as a general rule successful businesses provide solutions to the problems their customers face.
The best way to appeal to investors therefore is to explain the concept as a narrative: Our customers have a problem that our business provides a solution to: Explaining the concept in this way allows investors to view the business from the standpoint of the customer and to see its inherent value to them.
In addition to the concept being easy to understand in terms of a problem and a solution there also needs to be something unique about it. “Me too” businesses struggle to find investment because investors don’t want to pump money into a business that’s trying to compete against established companies with nothing new to offer.
It also helps if this uniqueness can be protected in some way although this does not necessarily need to be by way of a patent. In some instances, high barriers to entry or a considerable “first mover advantage” may be enough.
Does the business have the capacity for high growth? How quickly can it be scaled up and how much will it cost to grow it?
Whilst market size is important it’s not nearly as important as being able to identify how the market might conceivably adopt the technology. How will you interact with innovators to ensure that you gain traction initially and what will be your strategy for attracting early adopters?
Being able to map out a growth curve based on adoption rates and a sound marketing strategy is far more convincing than setting an arbitrary growth rate of (say) 5% per month and offering nothing as to how this will be achieved.
When it comes to predicting market share some consideration of your competitors and likely “push back” will also be welcomed. Entrepreneurs who claim to have no competitors nearly always fail to convince the savvy investor.
Every Business Network Manager or Investor I’ve ever spoken to has cited the business team as the single most important factor in deciding whether or not to invest. The bottom line is that people invest in people not business plans.
Citing the credibility of the business team in both your pitch and your business plan will improve your chances of winning investment. For obvious reasons entrepreneurs that have enjoyed success in the past are more likely to attract investment than new-comers but managerial experience, technical expertise and marketing acumen will be valued regardless of whether they’ve been gained in a start-up or a large corporation.
Having team members in place who have clearly defined job titles and responsibilities shows how the business will be managed. Here recognising gaps in your skillset does not diminish your credibility, it enhances it. Investors are wary of entrepreneurs who think that they can do everything on their own. It may be the case that individual members of the team have yet to be recruited to post and if this is the case describing the job role is advised.
Investors will also want to be assured that the business team is committed to the venture both in terms of time and finance. Having “skin in the game” shows that you believe in the business enough to back it with cash and this is important because the investor needs to know that they’re not the only person with something to lose.
In terms of finances it comes down to “how much”, “what for” and whether or not the figures seem plausible. As a general rule investors are happy to invest in people (salary spend), plant and machinery, stock and working capital. Investors are less likely to invest in sitting cash, excessive salaries (typically over £25,000) or paying off previous debt.
Credibility will depend on the validity of the assumptions that underpin your financial projections and your capacity to accurately assess costs. Investors will expect to see sales forecasts, cash flow forecasts and profit and loss projections.
Where the business has some trading history this should be alluded to in the business plan and it’s not uncommon to see accounts in the appendices. Unfortunately, a track record can be something of a double edged sword; whilst it shows evidence of sales the rate of growth will certainly be lower than that forecast post-investment – being able to explain why is vital.
It may be prudent to stage investments so that the investor isn’t being asked to put in money for something that needs to happen 3 years down the line. If you’re planning to undergo multiple rounds of investment prior to exit, then this should be explained also.
Naturally investors are looking to make a return on their investment so it’s important to explain what you’re offering them. Investors will not just want to know how much they’ll be getting but how quickly they’ll be getting it.
When it comes to ROI the method of exit is extremely important and investors will need assurances that entrepreneurs are willing to sell if required. This is because entrepreneurs are unlikely to be able to pay investors out of the businesses profits and initial public offerings (IPO’s) are rare. Instead investors are more likely to see a return on their investment via a trade sale so naturally they want to know that when the time comes the entrepreneur will be willing to sell.
Where the business is in terms of lifecycle will heavily impact upon the likelihood of it winning funding: There’s no point trying to win large sums on the strength of a business plan alone because nobody will give it to you. It’s wiser to try and find a small amount of “seed funding” early on to get the idea off the ground prior to bidding for additional funds.
The exact point at which a company becomes “investment ready” is open to interpretation and will vary from investor to investor. Some will want to see a fully developed product and a clear record of sales whereas others may be happy with just a prototype.
The stage that the business is at when you go for investment will not just affect the likelihood of winning funding it will also have an impact on the amount of equity you’ll need to give away. Early stage businesses are generally speaking higher risk ventures so the reward to the investor needs to be greater – conversely later stage ventures are less risky so you can afford to give away less.
I hope that this article gives you an insight into what angel’s investors are looking for in a business opportunity. I specialise in helping businesses write plans for the purpose of raising debt and equity finance so if you need help putting a plan together then please don’t hesitate to ask.