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What Investors Look for in a Business Investment – Attracting Angel Investors and Venture Capital

Business Investors Article

You have developed your Business PlanMarketing Plan and Strategic Plan, and now you are ready to approach Investors about funding your Company. But before doing so, it is important to know what the Investor is looking for and understand the Investor’s perspective. This article lists a host of variables an Investor considers when looking at a business investment opportunity.

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1. Market Driven Company: Market, Sales and Profits are more important than the Technical and Technological aspects.

a. Short payback Period.

b. User’s Benefit more important than Product Innovation.

c. More importance placed on Market-Driven verses Technology-Driven.

d. Market Penetration: If an Investor is convinced by your Marketing Research and Penetration Strategy then he or she sees your Financial Projections as Realistic and Achievable.

2. Your Business Plan should show How and When Investors can Cash In (Exit Strategy).

3. Investors are typically satisfied when Ventures reach 50% of their Financial Goals.

4. In general, Investors are looking for a Return on Investment in the 40-60% range, dependent on Risk and other variable determinants.

5. Investors manage risk by looking at the Management Team and Product Status.

a. A fully developed Product and proven Management Team should yield a Return on Investment in the 35-40% range.

b. Incomplete Products and Unproven Management Team should yield a Return on Investment of about 60%.

6. Investors calculate the Value of a Business at the Five Year Mark to determine what equity stake percentage will yield their expected Return.

a. Example Scenario: Developed Company

i. Developed Company projected to yield a 35% Return on Investment per year.

ii. Investors want 4.5 times their investment over five years.

iii. In Five Years the Company has $20 Million in Revenue with a Net Profit of $1.5 Million.

iv .Assume 10 times earnings: Company would be worth $15 Million in Five Years.

v. Company wants $1 Million in Venture Capital, so the Company should grow to 4.5 Million in Five Years to satisfy Investors.

vi. Company is worth $15 Million in Five Years, so Investors would require an Equity Stake of 33%, before Inflation.

b. Example Scenario: Undeveloped Company

i. Return on Investment Outlook of 60%, you will need a Net Profit of $15 Million in Five Years.

7. Companies with an Accepted Product, in a Proven Market, with Competent and Experienced Management, win the Investment Funds at the Lowest Cost.

8. Traditionally, Investors Gauge Performance by looking at Financial Projections compared to Performance, but they more often look at Management’s Milestones (Strategic Plan), Achievement Success and Adaption as the Process to determine whether and how much to fund the next stage in a Company’s Growth.

9. The Entrepreneur (Founders) must be Reliable and Driven. A Successful Track Record and Experience are Key.

10. The Entrepreneur should know his or her Money Needs at specific time intervals. Set up a schedule to track Progress with the Venture Capitalist so it will coincide with your Funding Needs.

11. Look at ways you can Reduce and Mitigate an Investor’s Risk.

12. Demonstrate your Credibility to an Investor by using a Network of Influential Mentors and Contacts.

13. Use a Combination of Debt & Equity Finance (see our Article on Financing a Small Business) with Investors.

a. Venture Capital Firm receives part of their funds in interest payments, which are Tax Deductible to them.

i. VC recovers Tax-Free Cash when the Loan Principal is repaid.

b. Convertible & Preferred Debt provides easy Liquidation.

14. Be Prepared for Investors Questions when you present your Opportunity.

a. Review your Business Plan Questions for possible Investors Questions (please see our Business Plan Workbook for a list of Business Plan Questions).

b. Know your Product Development Plan, Marketing Plan and Strategic Plan cold.

c. Answer these Five Key Questions about the opportunity before the meeting:

i. Why is this a viable opportunity?

ii. Why I am doing this venture?

iii. Who I talked to in a similar business?

iv. Have I tried out the Product or Service in the Market?

v. Has my Plan been critiqued by Accountants, Attorneys, Bankers, Consultants, Key Business Influences, Business Mentors and other Professionals?

d. From the VC Insider Section of the January ’09 Entrepreneur Magazine, Venture Capitalist, Brad Feld, has an Article, “Perfect your Pitch”, which lists eight common mistakes entrepreneurs make when pitching for Venture Capital:

i. Not Knowing Your Audience: Understand the Venture Capitalist’ niche areas of investment.

ii. Asking the VC to Sign an NDA: And we quote Brad Feld directly on this one: a Non-Disclosure Agreement “is a stupid idea perpetuated by lawyers.” Most VCs won’t sign an NDA so why try?

iii. Sending a 74 page Business Plan in the mail: Instead send a short email directly to the Venture Capitalist, personalized to him and his firm, introducing yourself and your Company. Send him a 3 page Executive Summary and a 2 page Investor Overview if the VC shows an interest to your initial email. The VC will let you know the steps and info needed from that point on. For a detailed explanation on VC Funding, please see the following ABC Business Consulting’s articles:

The Investor Overview

Funding Sources for Your Business

How to Analyze Business Funding Sources & Strategies

This article is an excerpt of a Chapter from our Business Success Guide. For the rest of the Chapter, please visit:  The Business Success Guide

The remaining major sections of the book’s Chapter have been left below as an outline so you can get an idea of what else is contained in this Chapter of the Business Success Guide.


vi. Spamming 150 Venture Capitalists with a “Dear Sir” Email:

vii. Name-Dropping other Venture Capitalists:

viii. Listing 27 Advisors but only one Co-Founder:

ix. Using the Wrong Materials at the Wrong Stages:

  • Executive Summaries
  • Investment Overview
  • Funding Business Plan
  • Comprehensive Business Plan
  • Due Diligence Package
  • Product/ Service Demo
  • Power Point Presentation
  • Marketing Plan
  • Strategic Plan
  • Loan Package