“It’s important to understand that the reason that most businesses fail is not because of a bad or poor execution; it’s because they run out of cash,” said Bob Burke of Natural Products Consulting during the first installment of SFA’s Maker Prep: Funding Your Business webinar series. Burke, joined by Lauren Abda of Branch Venture Group, spoke about the key elements to getting a business off the ground, including what investors look for and how to ensure the right fit for your company.
Do the Prep Work
Before meeting with investors, Burke recommended researching who they are, who they invest in, and the size of a typical deal. In addition, he said to be market-based, realistic, and fair with valuation, and recognize that venture capital companies typically do not sign NDA’s for initial meetings.
One of the best questions you can ask to make the most of your meeting, said Burke, is, “How much time do you have today and how do you want to use it?”
The application is the first formal indication you’d like to apply for investment, said Abda. These usually ask general questions about your business, but may also ask for references, so be sure to have those ready, she said.
Other things to have ready for an investor meeting are product samples, 3- to 5-year financial projections, and an investment opportunity deck including the following information:
• A problem identified in the market and how you'll solve it
• Team and advisors
• Market opportunity
• Competitive landscape and your differentiator
• Go-to-market plan
• Value proposition
• Gross margins and business model
• Stage of development and key milestones achieved
• Critical risks and challenges
Financial projections
• Funding ask and what it will be used for
What Early Stage Investors Look For
“This is a people’s business,” said Abda. “Especially at the early stage when you don’t have the numbers to get people excited, you are your product and you need to understand what you’re selling and how it fits with your investor.”
Abda shared that not only are investors looking for return on their investment and the ability to scale, but also a brand with a strong origin story and a connection with its product, taste, mission, health benefit, or environmental impact.
The fit between the founder and investor is a big consideration, said Abda; not all relationships will work, so a good fit is crucial. Investors are looking for a founder that has a commitment to the vision and a strong work ethic, a curiosity and willingness to listen, an openness to change, as well as someone who is honest, vulnerable, and has integrity. A strong and ambitious team is also important to investors.
Abda encourages companies to look for the same traits in an investor, noting that the investor-founder relationship is a two way street.
Why Investors Say No (or Yes)
There are a lot of reasons an investor might pass on an opportunity with your company, said Abda. Sometimes, the product lacks differentiation in the market, or the economics aren’t understood or are unclear. Sometimes the product has a limited growth opportunity or the company has unrealistic expectations not based on the market. Or, sometimes, it’s just simply bad timing.
Ultimately, companies that have a clear product/market fit, a strong team, relevant experience, and strong market and management references are likely to see success with an investor. Abda suggested that companies focus on understanding the path to success (including short- and long-term business objectives) and be able to show any sales momentum and traction achieved to date.
Related: 5 Things to Consider When Preparing for Sale or Investment; Report: Mergers, Acquisitions to Increase.