What investors look for in a person
Most investors have been burned, at some stage, by a poor investment in a business that proved unsuitable. As a result, investors have learnt what to look for when appraising a business investment, and what to avoid. It’s worth determining whether your involvement in the business ticks the boxes that investors will be looking to tick before making a financial commitment.
On this page:
Are people impressed?
Does your business have the ‘wow!’ factor? Talk to people about your business idea, or about the potential of what you are doing. If you can’t generate enthusiasm among friends, customers, suppliers and people in your industry, then there’s no way you will get an investor excited.
Sales or potential sales impress investors the most because these dictate revenue and potential profits. Can you demonstrate existing or potential steady demand for your product or service?
How much have you put in?
Other people will not invest in your business if you have not invested in it yourself. Investors want to see your commitment in two areas:
- Cash or assets.
- Sweat equity – your personal time and energy commitment.
Investors want reassurance that your money is at risk as well, so that if your business collapses, the pain is shared – and so, of course, is the joy of success. Committing all your available finances, irrespective of the dollar amount, will demonstrate genuine commitment.
The amount you would be expected to contribute will vary depending on your net worth and the industry you operate in. There’s no magic number, but you should consider contributing between five to ten percent of the amount you hope to raise. However, this can vary from industry to industry, as industries like health or biotechnology can cost millions. It also depends on your personal circumstances.
For example, a university student completing a thesis that forms the basis of new technology will have little money to contribute. However, if an ex-CEO of a large corporate has savings and other assets available, but does not want to contribute any money to their business, then this is seen less favourably by potential investors.
There is also the investment of time and energy that you have put into the business. A person may have spent years of their life developing a certain product or service, building a company website, fine tuning their premises, and gaining and retaining loyal customers. Such efforts are certainly taken into account by an investor. Years of labour can sometimes mean more than money.
Find ways to show the investment of your time and hard work, or sweat equity. The best way to do this is to calculate exactly how much time you have spent on a task or project, and then multiply this by an appropriate hourly rate. For example, if you have spent 2,000 hours developing your new idea or business, and you believe $100 an hour is a fair rate for your sweat and genius, then the value of your sweat equity is $200,000. However, be aware that investors may not recognise this value if the time has been poorly spent, or resulted in little additional value.
How committed are you?
In the early stages when you’re developing your idea or business, you’re likely to need other sources of income to keep you going. However, once you get investors on board, these might have to go. Investors like to see that you’re fully committed to your business. Other jobs or businesses will divert your attention, so investors will be looking for a single-minded focus and devotion to the task at hand. If you’re not prepared to put everything you have behind the venture, then why should an investor take the risk?
Your business track record
In addition to demonstrating your commitment to the business, you also need to demonstrate your past success in business. Has your existing business grown annually? If so, by how much? Have you ever been involved in another business? If investors are interested in your character and integrity as a business person, they will do background checks on you.
However, if you have no business track record, why should people take you seriously? Investors will be looking for a business that is capable of growing. If you are new to running a business or your business is still at the idea stage, you need to show that you have researched the potential demand for your product or service, and crunched the numbers as realistically as possible, allowing for best-case and worst-case scenarios. Be prepared to step back and examine your ideas and assumptions objectively.
- This information is provided by New Zealand Trade and Enterprise
