The topic of securing investments for small businesses is essential for business owners, managers, and entrepreneurs. In the broadest terms, what we’re looking at here pertains to raising money for your business, which includes many options. You can take out loans, solicit investment from angel investors or venture capital, sell bonds, or even take your business public. If these specific ideas are of interest to you, check out the video on ways to raise capital. But for now, let’s look at what it takes to secure investments for small businesses and what investors are looking for.
Commensurate Value Exchange
If you’re trying to raise money and get investment in your business, the first thing to look at is commensurate value exchange, a principle that seeks out an arrangement where both parties are benefiting from the arrangement. No one is going to get involved in any kind of exchange unless they perceive that what they’re receiving exceeds the value of what they’re giving up, Michael Bickert, president of Bickert Management Inc., reminds. The investor has to perceive that what they’re getting back is of greater value to them than what they’re giving. But this goes both ways. You as the entrepreneur must also make sure what you’re getting exceeds the value of what you’re giving up
Keep this in mind as you're seeking out investments. In fact, being empathetic in this process of business growth can be beneficial. Put yourself into the shoes of the lender or investor.
What are investors looking for?
So what does a prospective investor want? Bickert says that investors are going to look at the assets of the business, essentially its valuation; is there equipment or real estate involved? Are there liquid assets or inventory? Investors are also going to look at the potential of the business by looking at the history of sales and revenue and take from this an estimation of the business’ income earning potential. What’s the business’ trajectory? Is it likely to grow? These are things they’ll be watching for.
Investors will also look at future value based on network effects. Think of this as the user base, something that’s very common in tech businesses. For example, Peter Thiel was the first outside investor in Facebook, back when the social media network was still new and wasn’t profitable. But what Thiel looked for were the network effects. There was a lot of buzz about the site with droves of people signing up for it, and so he knew that it would become profitable. It’s a riskier investment certainly, but can have a major payoff because investors will take the outlook that the riskier an investment, the greater the expected return.
Investing in the person and the implementation of the idea
The next major idea is investing in the person and the implementation of the idea. Investing solely in an idea is hugely risky and savvy investors are less likely to invest based on that alone. They’ll want to see a business plan. But when investors do invest in an idea, what they’re really investing in is the person. Of course, these cases tend to happen most frequently with someone who knows you and believes in you and your business plan. But even if the investor is a family member, there’s still a level of marketing, persuasion, influence and sales that’s involved in this. There are still regulations around this form of raising capital, so transparency is key here and though it might be a more humble way to begin, it can help to increase sales and create a more desirable business so that it will eventually become attractive to larger investors. Just look at popular shows like “Dragons’ Den” or “Shark Tank.” Those big-time investors are looking for a level of already-existing growth in the business. Simply an idea isn’t going to be strong enough to lure the likes of Mark Cuban or Lori Greiner. So starting with people who know you well and believe in you can work best because they are more likely to take a risk.
Ward off discouragement by looking forward
This can all be a lot. Early on in the business’ life, it can be very discouraging trying to build something. So look inwardly at your own business and look forward. Ask yourself what you want in five years. Do I have a succession plan? Are the efforts I’m putting in now worth it? In the early stages, you are definitely going to be underpaid but think of the future. Think of how you can leverage all of these efforts that will pay off in a major way once your business is built. You won’t always have to wear all of the hats in your business.
Investors are also looking at liquidity and asking: how can I get out of this? You might be in your business for life and you have a succession plan. If you don’t have one, watch this video here. So while you are setting up the business for the long haul, investors might not be thinking in the same way. Investors want to know that they can get out of things if they are no longer interested. That person might believe in you but something might come up and they need the money. Keep this in mind as you approach people and remain empathetic. It might be helpful even to be upfront with your potential investors and ask them: “What is it that you’re looking for?” Then you can design your presentation around that. Consider their point of view.
The axioms to remember
So remember the two axioms: commensurate value exchange and the fact that people always operate within their own best interests. So give some creative thought to how you can draw investments into your business. It might be those in your circle with money or it might even be someone younger than you who can invest their time and talents into your business to help it grow. Just remember and accept that everyone’s asking: “What’s in it for me?” And allow them to see how they’re going to get more out of it than what they’re putting in.