Raising capital for the first time can be difficult for entrepreneurs. The criteria to evaluate the business plan differs from investor to investor. Venture capital is a whole firm in itself consisting of investors, board members, and people who help your business develop. But, Angel investors are individuals or small groups who look for different ways to invest.
According to Small Business Trends, angel investors and Venture Capitals each invested in only 3% of startups in 2018. While a report published in Medium says that in 2017, Venture Capitals invested in 6% of the startups. A good business plan for an angel investor might not be good for a Venture Capital. But, there are some common factors which every investor looks for before funding a startup.
1 – Target market for the product/service
This is the first thing any marketer will notice. How big is the target market for your product? This doesn’t mean they will only look for today’s market but the future as well. They usually want to invest where the market will grow rapidly so that their return on investment grows.
Usually, investors evaluate the market size over 5 to 10 years down the line. Investors or Venture Capitalists who have a market specialism in your niche are very knowledgeable about your marketplace and target audience so be prepared to spend some time explaining to them how your solution is different from that of your competitors.
2 – Need for your product/service
Apart from demonstrating a unique product, you also need to show that your product or service can provide solutions to market problems. No investor would like to invest in short-term plans or solutions. You need to demonstrate a long-term plan which has the potential to hit the market. Explain what your customer will get when buying your product/service.
More than 40 percent of the startups fail just because there is no need for their product in the market while 15 percent of them fail because of poor products. It would be great if you provide an augmented product to your customers. Additional services and benefits associated with the actual product are referred to as an augmented product. This will answer the investor’s question of why people will buy the service your company provides.
3 – Unique business plan
Solutions might exist to the problems you’re trying to solve. You need to show a business plan which differs from that of your competitors. This means you need to research your competition thoroughly. Look for the gap in the solution provided by your competitors.
Investors also expect to see other information on your competition and your plan to outdo them as well as plan for seamless implementation of your business. The information you provide about your competitor must be well-researched as well as based on recent stats.
Making a business plan and implementing it are two different things. Before you reach to any investor, show them that you and your team have already started working to build the business. This way you can show the investor that you’re not just talking and you’re serious about the business.
4 – Type of incorporation
An incorporated business/startup is a legal business entity authorised by the Government. It might sound like it’s not that important but it does matter a lot to the investors. It affects your personal financial security, the amount you pay as tax, and most importantly, who can invest in your company. There are different types of organization form such as limited liability company (LLC), Private limited, partnership, corporation, and Initial Public Offerings (IPO).
Every business form has its own advantages and disadvantages. Business forms like LLP allow founders to retain the control of the company while fulfilling its desire for financing. While the number of owners (investors) is limited in an LLC, it allows the organization to pass through corporate taxes. If in future you plan to trade your company publicly, it is better to go for a corporation form as it does not limit the number of people who can invest in your company. According to a report from Your Story, 93% of startups in India are registered as private limited companies.
Most investors prefer LLCs as it comes with a liability shield which means their liability is limited to the amount of their investment. But, no investor is same and hence you must choose the form of incorporation keeping the future of your company in mind.
5 – Return on investment
Always make a realistic assumption. You should also make alternative scenarios in case anything goes wrong with the first plan. Prepare your Exit Strategy. Exit Strategy is often misunderstood as the exit of entrepreneurs, but no it’s not. Exit Strategy means that you’ve thought ahead and made a plan as to how they’re going to get their money back if they invest.
If your business has barriers to growth or cannot grow significantly, there is less chance that any investor will invest in your company. The scalability factor drives investors towards your business. It means that if your business has the potential to achieve exponential growth, they’re more likely to invest in your business.
Most entrepreneurs do the mistake of preparing a business plan with the presumption of impressing investors. Smart and experienced investors can easily predict these things and it can pull down your excellent idea.
Raising funds can be overwhelming, but you can get ahead of the pack if you prepare a business plan keeping the above-mentioned points in mind. Even if you didn’t get funds on the first meeting, but have paved the way for a second meeting, you’re more likely to receive funds sooner or later.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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