Every entrepreneur and every business is different, but angel and VC investors share many similarities, particularly in the way they assess a business case for funding
In the hunt for VC or Angel investment, any small of start-up business will be placed under the microscope.
Having helped a raft of enterprises, the people behind planning tool BusinessPlanHelp.Me are well-placed to list the key factors that investors will be assessing.
1. The business needs to be scalable
This means a company is able to grow its revenues while still managing low incremental expenses, and create and maintain good margins.
Relative to a fixed cost base, the company’s revenues should have the potential to increase exponentially, and this therefore shows investors that you offer more profitability and huge growth opportunities.
Some business models are really suited for this, while others may not be if they need higher staffing levels, particularly in the service industries, for roles such as sales, tech, delivery, etc.
A common example of a scalable business is software, as selling more products does not need to incur much more production expense. Any company that requires lots of customisation or expert time in installation or consulting is not as scalable.
2. There is a large market and strong go-to-market strategy
Any small business needs to ensure that the addressable market is big – for instance, $500 million and not merely $5 million – for the best possible chance of revenue growth.
They must also build a clear market strategy to target it. Investors will ask questions such as: what is the process of getting to market? What is the length of the sales cycle? (This is often longer than entrepreneurs have planned.) How do the market and product work together?
3. The product is validated by customers and meets other criteria
One of the biggest things a small business must determine when considering an investment is demonstrating a clear idea of who is going to buy the product or service.
Investors need to talk with potential customers to validate that they plan to buy it. Does it solve a major problem for them? How does this product compare to the competition? A business should be able to easily communicate why its product is better than its current or future competitors.
There are also a host of other issues to consider, from intellectual property to manufacturing. A realistic product road map must exist and costs of production and delivery must be well thought through. These questions will be asked.
4. The business has the potential to be acquired
Many corporations that acquire innovative businesses are looking for high-growth, scalable companies with good margins and products that align with their own strategies.
It is extremely important for any business to have a clear exit strategy from the start when approaching investors, and for investors to understand who is likely to want to acquire, why these buyers would be interested, and the anticipated timelines.
BusinessPlanHelp.Me helps small businesses and start-ups strategise
5. The potential exit provides the return you need
Every potential exit comes with a return calculation that is based on a combination of how much was initially invested, the pre-money valuation, how much of a stake the investor owns, and the acquisition purchase price.
It is important for entrepreneurs, then, to have a clear idea of the price the company may attract upon sale as well as how much money was invested, and to what extent additional investment rounds in the future might dilute the ownership percentage.
If an investor is looking for 10x return on their investment, one way to increase the chance of this return is to work with a company that isn’t likely to require a lot of additional capital. They can then more easily understand how much the company needs to sell for in order to hit the ROI target. Of course, all of this is “in theory”, since exit predictions are known to rarely be accurate.
6. There is an excellent management team in place
Investable companies are led by solid management teams with experience, knowledge and complementary skills, along with the ability to build a great culture as the company grows.
While many angels prefer teams with previous entrepreneurial experience, some enjoy working with first-time entrepreneurs who have enthusiasm and energy and also surround themselves with experienced insiders and senior advisers. The team needs a realistic business plan and financials with a clear path to profitability.
7. The opportunity fits your personal preferences
Deciding which company is investable is going to boil down to a personal decision, as investors and angels will also have developed their own weighted list of preferred entrepreneurial and business attributes they want to work with.
Most investors will stick within industries and sectors they already know. Others consider geography, the stage of growth, the amount of capital needed, and many other factors.
The job of an investor is to evaluate risk, seek to minimise it and then balance the overall risk-reward ratio of the investment decision. The entrepreneur’s job, then, is to help achieve this.