Attracting investors to your business

Ideas for money-making ventures are not in short supply, but investors willing to back those ideas are much harder to find, writes Andrew Stevenson, director of gateway2investment (g2i) and chief executive of E-Synergy.

People seeking to commercialise their ideas often make the mistake of believing that because they think they need outside funding to release the potential of their business, they are somehow “investment ready”.

The truth is that to become investment ready requires aligning the interests of the business as closely as possible with the interests of the potential investors.

Delivering a compelling pitch to those with the money you need – whether a formal approach to professional investors, government agencies and banks or informal request to friends, relatives and colleagues – requires being clear about how you intend meeting their expectations and achieving their goals as well as your own.

Entrepreneurs seeking funding need to look at their businesses through the eyes of the investor in order to avoid some common pitfalls.

To begin with, ‘lifestyle’ businesses are unlikely to impress investors. A business set up to give the owner a way of achieving personal objectives such as escaping the rat-race or spending more time with the family is unlikely to make a compelling investment proposition. Investors expect the management team to ceaselessly drive the company forward, hit major milestones and make clear progress towards achieving its profits potential.

There is a similar common misconception that a ‘virtual’ management team can deliver results. Investors know that it is not easy building a business and that there is no substitute for people working closely together without distractions, focusing on building momentum in the business.

Pitching for investment can be frustrating and entrepreneurs have to work hard to avoid simple mistakes that instantly turn off potential investors.

Obviously it is vital to be knowledgeable about your product, your business and the markets you are involved in. Misleading investors is a major error that may damage your business and chances of future investment later. Equally, exaggeration and hype must be avoided if you want to maintain your credibility

A good example of this is when entrepreneurs tell investors that their product has no competition. Even if nobody is selling a similar product, you are still competing for a share of the money in a consumers’ pocket or an organisation’s budget. It is better to discuss what other companies are operating within or currently researching the same market before focusing on why your business has a more compelling proposition.

It’s also a mistake to assume a technology is so new, innovative and useful that it will market itself. For every 100 new ‘gee-whiz’ ideas, only one is likely to become a profitable proposition. Nothing ever markets itself, so as well as giving clear evidence of why the product is a winner, you also need to show a clear plan to get the product into the market so it can start to sell.

There is also a danger that people believe holding patents are a guarantee of future profits. Patents can be useful if there is a clear commercial reason for holding them. But investors also recognise that getting a patent is usually much easier and cheaper than defending one and will adjust their valuation accordingly.

When delivering a pitch, a refusal to answer questions is likely to come across as evasive and turn investors off. If you don’t know the answer, admit it but offer to find out and come back to the questioner. Most importantly, make sure you do know the answer next time you are asked that question.

Finally, it is important that entrepreneurs realise that getting an investor on board is only a step in the right direction, not the destination itself. When an investor puts their money into a business, they often consider it as a merger of interests and it is important not to imagine funds are infinite. Companies that make progress continue to receive support, but where progress slows or grinds to a halt, the investment funds are likely to dry up too.

Entrepreneurs seeking funds need an armoury full of weapons to attract investors. A good idea for a product or service is one weapon, but a successful pitch also needs to include details of the rest of the armoury – the strong management team and business plan, deep market knowledge, credible sales and profits figures and a clearly defined exit route that will deliver the returns the investors expect.

G2i is a programme supported by the London Development Agency designed support early stage technology companies in the capital seeking investment to develop their businesses. E-Synergy provides a combination of early stage finance, management support and training to companies and technology entrepreneurs.