What investors look for in a business
When approaching investors, you should put yourself in their shoes and consider what they will be looking for in your business. While the criteria might vary from investor to investor, and depend on the amount of funding required, there are several key elements all investors look for.
On this page:
- A competitive advantage
- A viable business model
- Barriers to entry
- High growth potential
- Potential to go global
A competitive advantage
Your competitive advantage is what you do better than the competition. Ask yourself, why do customers purchase your products or services rather than someone else’s? Let’s assume that you already offer exceptional quality and service. Can you list five key competitive advantages that can be defended against the competition? For example, do you have:
- great location(s) with lots of parking?
- an established and trusted brand?
- better prices and great after-sales service or guarantees?
- leading edge technology no one else has or can copy?
- patents, trademarks or copyright?
- contracts with key customers or suppliers?
- innovative and skilled staff locked in with shareholding options or profit sharing?
Investors will want to know that your business has unique strengths and is difficult to imitate.
A viable business model
Your business model is how your business makes money. Ever wondered why software companies make so much money? The intellectual property is developed once, and then the product, with a very low manufacturing cost, is sold millions of times. You might pay $500 for a piece of software, but the material cost (including box, instructions and CD ROM) might only be $10.
Do you have a business model that is attractive to investors? Does your business have extremely high margins that can be duplicated? And have you identified, through careful research, a large market to sell to? If so, you have a very attractive business model. Does your business require customers to make continual purchases as they use up your product or service? If so, how does your product or service stand out from all the rest so that customers will want to keep buying it?
Many businesses are now based solely online and sell from websites, rather than stores. This cuts their overheads substantially and means their prices are more competitive.
Barriers to entry
Barriers to entry can be anything that makes it difficult for competitors to start doing business, or copy elements of your business. If your business turns out to be really successful, you will undoubtedly spawn imitators. Potential investors will want to know how easy it is for competitors or imitators to copy your products or services. The harder it is to beat off the competition, the more difficult it will be to raise capital.
You will need to show investors what steps you’ve taken to:
- Protect your intellectual property (IP) by registering trademarks, brands and patents.
- Sign employment agreements with all staff that clarify all IP belongs to the business, not individuals.
- Lock in contracts with suppliers and maintain customer loyalty.
A trade mark protects your brand and logo, and patents are an excellent barrier to entry in that they stop competitors in your country from copying your design or technology for a fixed period. However, it is expensive to defend a breach of your patent by imitators in other countries. For example, the popular drug Viagra has been a major money spinner for the pharmaceutical giant Pfizer, but patents and the financial muscle of this giant have not prevented similar competitive drugs from entering the market. So many products can be bought online these days. This means that distance is no longer a barrier. If a business in Europe starts producing similar goods to yours at competitive prices, they could affect your business.
It is not unheard of for disgruntled ex-employees to set up a similar business to the one they have just left. Make sure your employment contracts state that any IP or innovations developed during the course of your business belong to the business and not to individuals. In addition, consider limiting which staff have access to information such as your customer database.
To attract investors, you’ll need to show that you have loyal customers and suppliers. Outline any customer loyalty schemes you have developed; how you keep in touch with, and reward, your best customers; and any long-term or exclusive contracts you have with suppliers. If you can demonstrate that you have built a relationship with your suppliers by gaining increasing credit and making regular personal visits to them, so much the better. Finally, for some businesses, your ability to stay ahead through innovation and commitment to research and development might be your greatest asset.
High growth potential
Investors tend to invest in businesses that have high-growth potential or offer a solid return on investment. For example, technology industries (such as the Information Communications Technology industry) have received a fair chunk of venture capital funding in recent years. However, there are many other industries that offer big potential returns.
Demonstrate your business’s growth potential to investors. Research the potential growth of your industry, and provide information on other successful firms in the industry, to give investors clear evidence that your business is an opportunity worth investigating.
Of course, a successful track record of sales growth is the most convincing way to demonstrate your business’s growth potential. Make sure you have these figures clearly outlined, and can explain where your growth is coming from. Is it from specific products that customers can’t get enough of, or is your customer base continually growing?
Potential to go global
Potential investors will want to know that you’ve identified all the target markets for your business, as ultimately this is where the sales revenue will be generated. Here are some key things to consider when looking at overseas markets:
- Size – do your products appeal to a niche market or a larger market?
- Can you target several markets?
- Will you be the first to the market? If not, who are the competitors in the market?
- What else do you know about potential overseas markets, in terms of language, culture, business etiquette, and how you will get your products there?
To be desirable to venture capitalists, you need to demonstrate that your business can go global. For example, if you believe your products or services would succeed in the United States, you’ll need to show you have a key competitive advantage, have identified potential distributors, and tested the market.
- This information is provided by New Zealand Trade and Enterprise
