Investors’ priorities are opposite those of most entrepreneurs. Entrepreneurs focus on their technology or product. Then, they highlight the market. Finally, they outline the people and skills they have to carry the business forward.
Investors take the opposite tack. They focus on people, then the market, and finally the product or service. Their experience is that great people working in a large and underserved market will discover and develop the products and services needed to be successful.
The flood of new business starts and expansion of venture capital funds heighten the need for people-focused investment. Investors need to commit increasing sums of capital. They want to place their bets on entrepreneurs who have previously made money for investors.
If you are an entrepreneur looking for investment dollars, here are some guidelines to help you satisfy what investors want.
Building businesses that yield high returns to investors requires a special knack. Venture capitalists typically want 7 to 10 times their money back (and more, if possible) within 5 years. That is not a simple proposition. The entrepreneur and his or her team need superior strategies to create distinctive value in the marketplace, sustainable competitive advantages to realize the value, and a special sense of timing to know when and how to sell the business or go public.
If you don’t have team members with proven expertise in these areas, find some who do. Attract board members with proven track records and a willingness to invest in the company. Investors like to see that everyone has some “skin”—something at risk—in the business.
Virtual business relationships enable businesses to access needed talent without full-time staff. Nonetheless, there’s extra value of dedication when someone has committed his or her career to the business.
Investors look for large, underserved markets. They want to know that prospective customers have a need and are willing to pay for a solution now.
A start-up company needs lots of room to learn, make mistakes, and grow. It’s much easier to achieve that result when the market is growing and can accommodate several players.
Desirable markets are $500 million or greater in annual revenue potential. This gives enough room for the business to get a lead market share (25% or more) and become over $100 million in annual sales.
With $100 million in sales and a valuation at 1.5 times sales, the business would be worth $150 million. If the employees retain ownership of one half of the company, this would give investors of $7.5 million a ten-fold return.
If your market isn’t large enough, look at ways to expand it. A California communications start up doubled its market size by extending its business to the family, friends, and co-workers of its target market.
3. Products and Services
Products come last because the first products are rarely the most successful ones. For example, a Silicon Valley company thought it had a killer new product. Despite the best-laid plans, it took three product iterations to hit the market successfully.
Investors look for a distinctive platform of products and services. Is there enough innovation to support a variety of new products? If the first product doesn’t fly, can the company develop other products? Show how your business offers multiple product or service opportunities.
If you have a big opportunity, look for how you can leverage people, markets, and products to capture investors’ attention. Making money for investors will also make money for you.