Ask any owner if they deserve investment capital to take their business to the next level, and you almost always hear a resounding “yes!” However, the harsh reality is that most businesses do not deserve investment capital – not even a bank loan. If owners mismanage their business, or operate in an industry where demand does not exist, investment capital cannot save it. In this situation, savvy entrepreneurs know to let nature take its course, while they make plans to move on to bigger and better things, and wise investors know to look the other way in order to protect their capital.
While several lists exist detailing ways businesses can obtain venture capital, here are five things every entrepreneur needs to know before doing so.
1. Know What Your Investor Cares About and Why
No matter the size of the loan, business owners need to know what their lenders actually care about. Not even angel investors provide capital for just altruistic reasons. Investors want to make a profit.
Breaking even still represents a loss to investors, because they lose out on profit they could make from investing their capital elsewhere. For this reason, business owners must learn to structure their business in a way to attract investors by meeting their criteria.
Most importantly, venture capitalists look at the size of the market in the industry the business operates. Venture capitalists want big returns, so most won’t invest in restaurants that can only serve a local marketplace. Even if the restaurant remains open 24 hours per day, 7 days per week, it can only sell so many meals and no more.
Conversely, a business can sell weight-loss pills anywhere to anyone that wants to lose weight, as long as it meets standards in that region. For example, with more than 60% of the U.S. qualifying as obese, weight loss pills always have a large market in America.
2. Identify the Option that Works
Most people believe the only way to obtain investment capital involves loans from banks and other lenders and investors. However, several other options exist. Make a choice depending on the size of the business and the amount of startup capital needed.
If the business requires only a few hundred or few thousand dollars to get started, then it may make sense to save toward that goal. This becomes a more attractive option if the business does not qualify for a loan, or fails to attract the interest of investors. More importantly, it means that a business owner only owes himself money at the end of the day.
One innovative way of obtaining funds involves crowdfunding campaigns online. Kickstarter continually ranks as the most popular and effective site for attracting funds in this way. Support may come in the form of donations, pre-orders or even offering professional expertise and assistance.
For investments of a million or less, consider a micro venture capitalist, which typically offers investment capital of about $10 to $50 million. For investments of $5 million or more, the fund should provide about $150 million for investments. Governments often provide grants, as well, to assist pioneers in particular industries.
New and innovative methods of obtaining funding continue to crop up every few years. Remember that conventional methods do not always represent the best route. Research and use the method that works best for the business and its specific needs.
3. Have a Business Plan
Don’t just know what you want to achieve. Put it down in writing. Investors love to know that owners have a passion for what they do, but investors also need proof that owners did their research and essentially know what they’re doing. Prove that by writing an official business plan. Often times this simple tool is the difference between a yes or no from an investor.
A business plan details who owns the company, what the company does or provides, and identifies the target market. The business plan also includes information on the business’ strengths and how it expects to capitalize on opportunities in the market. Additionally, it should illustrate the business’ weaknesses and how it plans to overcome these, as well as, how it intends to combat threats and competition in the market.
Also include financial information, such as, cash flow forecasts, income statements, balance sheets and charts showing progress. Most investors want to see this more than any other part of the business plan. It is one thing to tell an investor that a business can give him a high return on investment. It’s another thing entirely to illustrate this with real numbers and forecasts.
Present the investor with a full business plan and use a PowerPoint presentation if possible, to bring the main points across. Prepare yourself to answer questions, and know the business plan inside out.
4. Female Business Owners Face more Difficult Challenges
Most people see the act of taking charge as a man’s job, not a woman’s. In fact, even other women believe this. In spite of advances in women’s rights and equality, this stereotype continues to hold ground over the years.
For this and other reasons, women face far more difficulties than men obtaining funding from traditional sources. According to a study conducted by The Clayman Institute for Gender Research at Stanford University, women generally lack contacts within the “old boys’ network” of funding sources. Furthermore, many professional investors have less confidence in women than men to penetrate their intended markets.
Female entrepreneurs should keep these expected challenges in mind when trying to raise capital. Do not allow it to intimidate you. Recognize that the problem exists and aim to work a little harder than male counterparts in order to get ahead. It all pays off in the end.
5. Create Something to Start With
Some investors have a creative mind that can see how an idea may materialize. In fact, the most successful investors possess this capability. However, even these investors prefer to see the business in action, instead of just an idea. For this reason, the best approach is to start off with something tangible before attempting to attract big investors.
For instance, if an inventor designs a device that makes cars more energy efficient, he should attempt to get the first prototype under way. No matter how detailed the diagrams and calculations, no theory or blueprint can create as great an impact as having the working device to present to investors.
When creating the prototype, start small. Investors understand that the owner does not yet have all the capital needed to create something that looks as good as it works. Do what you can to make it look good, but focus more on quality. If the company provides a service, bring good reviews and customer testimonials. If the company sells products, provide financial documents demonstrating how many items the business has sold to date.
Remember, investors know that it is easier to create big things from little things, than big things from scratch!
Roman Temkin is an entrepreneur and real estate developer from NYC.