Demonstrating your business’ value to investors is a crucial skill and one that plays a large role in whether your funding round is successful. Here Grant Bergman, a director at growth capital advisor finnVentures, shares his experience and talks about how to avoid rookie mistakes.
1. Don’t be unrealistic
A confident approach when pitching to investors will certainly help to frame your business idea as an attractive investment proposition. But there is a fine line between having conviction and imposing a personal opinion that doesn’t match up with reality.
When it comes to valuing your business, keep the numbers modest but sensibly optimistic, and ensure they’re backed up by comprehensive market research. Customer and market alignment is one of the first things investors ask about, as is a sustainable unique selling point (USP).
Even if your business outperforms expectations it demonstrates pragmatism and that you haven’t fallen prey to tunnel vision, which unfortunately is all too common. Under-promising and overdelivering is always a smart tactic.
2. Get the right advice early
It is a grave error to think that one can go it alone when trying to build a valuable company. Many entrepreneurs can be overly territorial of their ideas in the initial stages without realising that this is exactly the time when they should seek help and advice from as many sources as they can. It can sometimes be the difference between thriving and failure further down the line. Asking for help is a sign of strength, in life and in business.
In regards to sources, there are many investors these days who provide more than just financial backing. Many funds are led by teams who can provide in-depth market understanding, operational support and open the door to lucrative and sometimes unsuspecting distribution opportunities.
A rookie mistake startups make is pitching their product or service as if the investor is the end user or buyer.
Some advisers and brokers, like finnVentures, can also help with due diligence, defining your USPs, mitigating risk and identifying development opportunities. We recently helped broadband company Voneus raise £4.8m by strengthening its proposition and matching the right investors who had similar ambitions as the company.
3. Build relationships with investors
Investors like regular, honest and proactive communication. It is important to remember that an investor is not just investing in your idea but also in you personally. Taking someone’s money and then leaving them in the dark is a fool-proof way to lose their interest and potentially burn a bridge.
An open and ongoing dialogue on the other hand, a process which should start early on, helps to build up trust which is the cornerstone of all good investor-investee relationships. Even bad news can be taken well if there is transparency.
Additionally, some investors would be only too happy to provide feedback on key strategy and operational issues. Although frequent updates are always encouraged and welcome, many investors also appreciate being asked to provide input on certain decisions, large or small. This shows that you value their opinion, not just their wallet. See investors as being an extension of your own team.
4. Communicate clearly
Miscommunication and lack of communication are both as bad as each other. When defining your relationship with an investor, it is vital to be clear from the outset about what you expect from each other. In addition it’s important to make sure that all parties are singing from the same hymn sheet about the vision for the company, its scale and growth, and any potential exit plans.
Always remember when speaking to an investor that their only real concern is the returns they’ll get on their investment. This needs to be the key consideration around which all other conversation should be structured at the inception stage and thereafter. A rookie mistake that many startups make is pitching their product or service as if the investor is the end user or buyer. Knowing your audience is the first step to clear and constructive communication.
5. Don’t give away equity too early
Even if you have solid and stable relationships with your investors, it is important not to give away your founder or manager equity too early. It is wise in the startup phase to have options available to you in regards to the direction you want the business to go. Holding on to equity also means you’ll be more motivated to carry on growing the business. Of course, investors need motivation too, but there are other options such as cash compensation or equity linked incentives that can have significant pull.
It is a balancing act to decide on the funding and equity structure, but take your time and use the control productively while you have it. Most importantly, investors want to see that management are incentivised enough to drive and to stay with the business. Finding the right investors is critical and when done properly can mean less dilution and greater future gains.