When it’s time to raise capital for your business, you generally have two options. You can seek out debt financing, in the form of a loan, or you can seek out equity financing, which means that an investor agrees to purchase a portion of your business. The process of applying for debt financing is relatively straightforward, as the bank or lender mainly wants to confirm that it’s likely to be paid back.
Getting financing from an investor is a bit different, as they are buying into your company and will (if all goes well) have a role to play in its growth and development. When you’re considering approaching investors for financing, it helps to understand how they think and what makes a business seem like a good bet to them. Here’s what you want to consider when thinking like an investor.
Know What Makes Your Business Different
You’re probably familiar with the old investing mantra, “the higher the risk, the higher the reward.” As a business owner, you might feel tempted to play it safe when you approach investors. You might think it’s a good idea to focus on the ways your company is like others out there, or on ways how your business operations have been proven to work time and again.
But an investor is likely to take a different approach when considering companies to invest in. If there are already multiple businesses in an area providing a particular service or product, why would it be worthwhile for an investor to purchase shares of a company that does what everyone else is doing? It might feel bold and risky, but from the investor’s point of view, it’s better to focus on how your company stands from the crowd. You might have developed a more efficient way of providing a particular service, or your product might do more, but cost less.
When you think like an investor, you highlight how your company is different and why those differences matter.
Know Your Finances
Although investors are willing to take risks, few want to throw money at a company that’s sinking fast. For that reason, you need to have a clear understanding of your finances and what those finances mean for the future stability and ongoing health of your business. A virtual CFO can help you make sense of your company’s finances and also guide you to strategies to increase your income and revenue and to help your company save money.
Along with knowing your current financial situation, it’s worth taking the time to run projections of your company’s future finances. You might bring in X amount of revenue and XY amount of income today, but what do you see your business earning in two, five or 10 years? What steps will you take to make sure your company stays on track and reaches its financial projections?
Know What Your Business Plan Is
Although there’s the common assumption that having a “vision” is enough to win over investors, the reality is that many want to see a fully detailed, concrete business plan. When you think like an investor, you turn ideas that might seem grand and not fully formed into a tangible action plan. Part of knowing your business plan includes having a well thought out elevator pitch, which quickly sums up the basics of what your company is and why it’s different.
It also involves knowing your market and where your company fits in, as well as projecting how that market will evolve or change in the future.
Know Your Team
It’s also a good idea to take a close look at your current team and at who you’d like to join your team. Investors want to see experience and know-how from a company’s management team. When you think like an investor, you’re more likely to find and hire the team that will help your company grow and succeed in the future.
Thinking like an investor is just the first step to obtaining the equity financing your business needs to move forward. The team at New Direction Capital can help you through the process of finding and approaching investors and through the process of determining which financing options are right for you at the current moment. Contact us today to learn more.