There never seems to be a shortage of people wanting you to invest in their brilliant idea that is going to take the world by storm. So what do I look for in an investment opportunity?
Just to be clear, I’m not going to invest in a business where the money goes to paying off loans, scooped of the table by founders or pays off some other obligation. The purpose of investment money is to GROW the business so that it is successful…..not clean up messes.
When I invest in a venture, I’m actually investing in a person so I really listen to not just the content of the pitch but whether the person giving it really understands the value proposition. If they can’t articulate the value proposition in about 1 minute, then I become completely disinterested. I’m not deliberately being rude; I just don’t have the time for someone that hasn’t clearly thought about it themselves. It may be a good idea but a potential founder who hasn’t thought about why it is of benefit to customers is not investable.
The second thing I look for is the background of the founder and how they came up with the awesome idea. I’m wanting to hear passion in the voice and why they are going to put everything on the line to get the business up and going. Entrepreneurs tend to have a succeed at any cost mentality that allows them to push through or around any obstacles in their path. If that attitude isn’t there, then you’ve lost me.
Assuming I’m still interested I’ll request a deck. The deck needs to synthesize the entire business in about seven slides. Any more than that and you’ve lost me again…. The slides tend to be:
1. Summary page – (eg. Including how much you are seeking for what valuation)
2. What is the problem being solved?
3. How is the problem going to be solved by the new business?
4. Market size and how it is going to be reached.
5. Potential competitors
6. Financials / Investment
7. The team
I want to be absolutely convinced that you’ve thought about all of the issues for the new venture. Trust me when I say that breaking the business down into a very short deck will help you really think about all of the issues. Behind each slide there should be a lot of research that you can provide me at a moment’s notice. It’s all a part of the business plan that you will execute once you’ve received the investment capital.
Whatever you do, please be realistic on the investment and valuation. I had a startup business come across my desk the other day that had an insane valuation. They had no revenue or product and were giving up 5% of the business on a $13m valuation. They were essentially value an idea and it really wasn’t that great anyway….
If the business is a going concern then whatever you do, have your financials up to date. I am never going to invest in a business where the founders have a cavalier attitude towards the books. If you are a completely new start-up, then put together a cashflow and make sure you really understand all of the assumptions underpinning the “hockey stick” retained cashflow of the business.
BTW – I’m yet to see a business plan that doesn’t have somewhere in it that it’s a sure thing and going to make millions. I can guarantee you that despite all of the care you’ve taken with the business plan you have still underestimated how much time it will take to get started.
In the cashflow I’m going to get really focused on how big a hole is being dug and also what are the assumptions that drive the cash burn. If I’m still really interested, I’ll probably dig around to see if the cashflow can be adjusted to minimise the level cash burn. From here I’ll calculate the “go/no go” point.
When someone invests in a business there are basically one of three decisions that need to be made at some point in the ventures early stages. If the business is going gangbusters then everyone is happy and congratulations are all around. If the business is going out the backdoor then the decision is simple, close it down.
The third one is a bit harder, if the business is “struggling but may make it” then it requires a LOT more thought…..and this is where businesses typically end up somewhere in the first twelve months. The business is neither thriving or dying but just limping along. These businesses tend to soak up time and sadly, it’s often better to just kill them.
If you are really after a particular investor for their skills and what else they bring to the table, you may want to offer some equity just for them being involved. I’ve done this a number of times over my business career. I’ve dramatically reduced the valuation (to almost nothing) just to get particular individuals into the business. I’ve never regretted having a smaller percentage of a large pie over a big percentage of a small one.
Please let me know any of your thoughts on this topic and if you would like further articles on how to get business investment.
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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.
Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.
