Four characteristics that make your business investible
Or “What investors are really looking for”
On our recent travels with the Business Finance Guide, we spoke with bio-tech innovator, Exonate, and some of their key investors.
What came out was extremely clear – that investment is rarely made in an idea alone, but rather in the people that will run the business.
According to Exonate founder Catherine Beech, “There are a lot of entrepreneurs. But being an entrepreneur does not necessarily mean you understand how to go about financing your business”.
So, what characteristics do investors really look for?
We spoke with Sunil Shah, CEO of O2h Venture Ltd, an experienced investor and now also Chairman of Exonate, who offered this piece of key advice:
“People will only do business with people they like. Ultimately, they are investing in you”.
Sunil went on to explain that it’s vital to make the effort to arrange a face-to-face meeting wherever possible, and within that meeting, to carve out a small amount of time to find common ground – interests, family, sport – anything that creates dialogue and a connection with the investor, and makes you memorable.
It’s vital that the investor feels that you are someone they can work with. That you have the ability to listen, take on board advice, and pivot your strategy if needed.
If you also have passion, confidence, common interests and a sense of humour, this can go a long way. Think carefully about the team that presents the pitch. Arguably, investors say, 3-4 people at the pitch meeting is a good idea.
According to ICAEW’s Shaun Beaney, “Innovative technologists and entrepreneurs would wisely put plenty of creativity and personality into their pitch decks and live presentations”.
And then really listen to what investors are asking for.
If investors don’t believe in the team, then they won’t back it, no matter how good the solution looks or how attractive the market seems to be.
- A well-researched Idea
For product and technology focused entrepreneurs, the idea itself, and the pain point (or opportunity) that this addresses is often very clear.
Sunil Shah recalls the Exonate pitch, “The scientist who presented his idea was very passionate. He’d even got his brother to invest, so I knew immediately that he was very serious about the potential of this solution”.
For a service-based business, presenting a deep understanding of the market, the gap that you can fill, and a people-based point of difference is often key.
Investors need confidence that a business idea is robust. You can demonstrate this by testing the idea in some way, shape or form, to prove the business model. Demonstrating the return on earlier rounds of investment, conducting research directly, or achieving early successes through testing a “minimum viable product” (MVP) are all great ways of validating your business case.
Research and testing the market are not enough, however.
Entrepreneurs would also do well to research their potential investors, and tailor their pitch accordingly. According to the highly successful serial investor Peter Cowley, “I have listened to more than 1,000 pitches, and reviewed more than 5,000 business plans , but invested in just 60 companies. I have a checklist with 16 very clear criteria on my own website”. Peter estimates that he receives more than 1,400 business plans every year – but that only a small fraction have bothered to make sure their pitch matches his investment criteria.
- The Business Plan
Investors like to get a strong sense of the rationale behind the revenue projections.
What’s your revenue model? What are your headline numbers? How will you generate and increase income? What assumptions are behind your growth forecasts? Is your valuation realistic? And is there a potential profit at the bottom line?
The person that is running the business, or in most cases the team that will pitch the business, must have absolute confidence in the ideas they are promoting, and how the business will capitalise on those ideas.
Sunil Shah puts this succinctly, “Know your facts. Keep it simple. And tell a good story”.
Investors look to get a sense quickly of not just what you do, but why it’s of value.
Peter Cowley explains, “Bad pitches. It’s not about whether you are nervous. Confidence is good, but I’ve invested in nervous entrepreneurs before and will again. What is bad is when a business has not covered all the basics – pain points, competitors, team, routes to market”.
- Tax advantages
If a business owner is able to offer potential investors a tax advantage, this can be the icing on the cake, and give your proposition an edge over other potential investment opportunities. The SEIS scheme covers the first £150,000 of external investment. Aimed at early stage businesses and start-ups, it encourages investment by offering investors generous tax breaks.
SEIS offers investors 50% tax relief against the cost of their shares and they are able to invest up to a maximum of £100,000 in qualifying businesses in any tax year. This means half the amount invested will be deducted from their tax bill.
According to Sunil, “if you are looking to raise finance, try to get EIS or SEIS pre-approval. It’s a great scheme introduced by the UK government which will always get angels in the UK to invest, as it really does de-risk their investment”.
Read our recent article on EIS and SEIS to find out more.
Preparing your Business Plan
When ICAEW’s Shaun Beaney was recently asked to speak to start-ups as part of a recent series of seminars produced by the Design Museum and Creative Entrepreneurs, he asked 40 sophisticated investors, advisers and entrepreneurs what they most like to see in business plans and what goes wrong.
You can read their advice in Shaun’s recent article for InnovateUK.