Showing strength of character and personality will go a long way to getting you on the investor’s radar, says Jeremy Cummin. It will demonstrate that you are a serious player with a deep commitment to making your idea a success
For many MBA students, the experience can lead them to starting their own business. Just as these businesses take many different shapes and forms, so to does the way in which they can be supported financially.
Some, such as a professional service which has minimal overheads, may be able to operate without the need for external funding.
Others, particularly those involving product creation or which require considerable software development, may need more financial support in order to become operational.
For those students who are lucky enough, family and friends may be able help them get off the ground however for most businesses, there will come a point when third party investment is needed to take the idea to the next level.
This is likely to take the shape of an angel investor who will be investing their own money (typically up to £1million) and be more hands-on or a venture capitalist – a larger organisation comprising an investment team which is answerable to a board of directors and typically operating with sums in excess of £1million.
Irrespective of the differences, they are all looking to invest in opportunities that will yield a strong return on investment so will be selective about who they work with.
There’s only so much money to go around and in the shadow of the coronavirus pandemic, securing investment has become particularly challenging.
Research from Plexal and Beauhurst showed that funding for UK start-ups seeking investment for the first time fell by 89 percent between March and May 2020 compared to the same period in 2019.
This means that it’s more important than ever for students and entrepreneurs to make their business ideas as attractive as possible to investors to ensure they stand out from the competition.
This competitive advantage doesn’t just apply to the innovation of the idea itself, but also to the viability of the business.
There are a few common factors that investors invariably consider to help them establish if a business is worth their time in the first place, let alone their money.
If you can demonstrate that you have done your homework, it will make it easier for investors to carry out their own due diligence which in turn can help speed up the funding process if the information they need is already available. It will also show an investor that you are a serious player with a deep commitment to making your idea a success.
Scope out the timeline
First, explain the backstory behind the idea – when it was conceived, what progress has been made so far and what stage the company is at, together with who was perceived as the customer, and why they would find this attractive
Add colour by explaining how and why the idea was conceived in the first place. For example, did you encounter a specific problem that needed solving or have you come up with a means of significantly transforming something that already exists?
Include a clear overview as to the future direction and long-term goals for the business. For example, is it expansion into new geographic territories, developing a broader product range, acquisition with a buy-out or disposal of IP?
Facts and figures
Clearly itemise the key facts and figures for the business. These should include the estimated size of the market, the number of people employed or who have a vested interest in the business.
For any business ideas which centre around a physical product, detail the materials that are required, the logistics of the manufacture and supply chain and how ethically sourced the materials being used are.
Be able to show what profit margin the business should be operating at and, if the business is product based, how much does each one costs to make and the estimated sale price
Provide a ‘who’s who’ chart for everyone involved in the business – whether it’s just one person or if a number of others are involved. Don’t forget to include any silent partners, stating how much sway (if any) they have on the business.
Is any special expertise needed to make the idea a success and, if so, who has this knowledge within the business to provide this? If not it may be that this additional expertise needs to be outsourced, for example through partnerships or taking on sub-contractors.
It’s also important to demonstrate the ability, experience and track record of the management team along with their commitment to the business – whether it’s through equity, a Long Term Commitment Plan or other commitment. This doesn’t necessarily mean that someone with little or no business acumen will be unable to secure funding, it’s just another means of showing transparency so that investors know in advance what they are taking on and the levels of support that may be needed. It can also help investors weigh up how likely individuals are to walk away post investment.
Know your market
At the most basic level, is the idea aimed at consumers or a business audience? From here you can then drill into the finer details of the typical demographic of the customer and the potential size of the target market.
Explain what problem/s you are trying to solve and the sort of person who would want to use this product or service to address it, especially if there is a similar offering already in the market.
Be able to show investors that you have taken the time to speak with potential customers, that you have taken their feedback on board and tweaked your offering where applicable to enhance its appeal further.
In the case of a product, having a mock-up or prototype can be a useful means of testing, experimenting and getting feedback from potential customers. Using an early version of the product can also help identify potential enhancement opportunities which hadn’t been considered previously on paper and which could put it in a stronger position.
Being able to provide positive feedback from customers – whether they are actual or potential – will help show investors the validity of the idea in the first place and that demand for it already exists.
An important part of knowing your market is to understand the risks that could be presented to your idea so be able to detail these along with how you’re going to mitigate them.
An important part of knowing your market is to understand the risks that could be presented to your idea and how these extend to staff, the supply chain, manufacturing, regulatory changes and many others. Each risk needs to be evaluated and, where appropriate, mitigating strategies developed.
Intellectual property and legal protection status
Starting to develop a business idea without having an intellectual property (IP) strategy in place is asking for trouble.
IP needs to be protected in order to ensure competitiveness and ultimately business success. Investors will want to know if an IP strategy exists, if any patents have been filed and what these cover..
Make sure that the scope of protection is correct – if it’s too narrow, competitors could easily circumvent it but make it too wide and it could be impossible to get the invention patented.
Make sure you have also researched if any other patents in a similar field exist and be aware if there is any potential for these to hinder the development of your idea.
If there is no IP strategy in place, be able to explain the reasoning behind this decision and if some other protection such as trademarking is being used instead.
Additionally, if there are there any regulatory requirements that need to be adhered to, state to what extent these apply to the business and how well it is placed to ensure compliance.
Do the maths
Ultimately investors will want to know how lucrative the idea is and how much they can expect to get out of it over time.
Demonstrate how much the business is currently worth and then, taking into account the size of the customer base along with the experience and skills of the management team, predict how much it could be worth in the future.
Have a clear breakdown as to the size of investment that is needed to take the idea to the next level, how and when this money will be spent and what return on investment can be expected.
Investors will also want to know what other funding (if any) has already been secured, and the associated arrangements regarding return on investment on this for the various parties involved.
Bear in mind that funding doesn’t happen overnight so time your investment round carefully. Allow a sufficient time gap between starting negotiations with potential investors and actually having the money in the bank account.
Believe in yourself
Finally, beyond the merits of the business idea itself, investors will want to work with individuals that they like and can trust to do a good job. A common character trait of an entrepreneur is the ability to overcome adversity – just because something hasn’t worked first time around doesn’t mean that success won’t come eventually.
Showing strength of character and personality will go a long way to getting you on the investor’s radar. Work on building a good relationship and rapport with the investor and if things don’t work out this time around, at least you’ll not be starting ‘cold’ with them again next time around.
Jeremy Cummin is a Director at Sciony, an integrated innovation ecosystem which helps innovators turn ideas into reality. Jeremy is a seasoned entrepreneur and investor with 45 years’ experience in bringing ideas successfully to fruition.