The competition for funding is fierce.
There are thousands of smart entrepreneurs and business owners just like you who are looking for investors’ money.
Every year, banks, venture capital, private equity, foundations, and all kinds of informal and institutional investors have to screen through dozens of candidates to make a decision about which businesses to invest in.
And if you want their money, you have to be VERY convincing.
Unfortunately, many people who are trying to raise money from investors are not quite convincing.
Over the last 10 years, I have worked with several entrepreneurs to package and pitch their businesses to potential investors.
In total, our clients have raised over $5 million in funding for their businesses. And some of our shining stars have won prestigious prize awards after beating other contenders at business pitch competitions.
I’m going to share some very interesting insights from the strengths and weaknesses I have noticed when entrepreneurs try (and often fail) to convince investors to give them money.
So, in this article, you’re going to learn the 10 most important things investors want to know before they give you their money.
It doesn’t matter if you send an investor your business plan, pitch to them over Zoom, or submit a proposal at their office.
No matter the format you choose, just make sure you address these 10 important questions that are usually on the minds of investors.
1) Why will anyone pay for this?
So, you have this brilliant business idea or an amazing product that you claim could become a billion-dollar business.
But what investors really want to know is: “Why will anyone pay for this?”
In essence, what is your value proposition?
That’s a very valid question because investors only want to invest money in businesses that make money.
And a business will only make money if people are willing to pay for what it sells.
The real reason investors ask this question is they want to know if there is a real motivation for anyone to buy your product or service.
And when it comes to real motivations, there are only three motivations that will make people dig into their wallets and give you their cash or credit card.
They are: problems, needs, and desires.
If your business is not solving a serious problem, or filling an important need, or satisfying a strong desire, it’s unlikely that anyone will pay for your product or service.
And if nobody will pay for it, investors definitely will not invest in it.
2) How well does it work?
This is one of the most important questions investors ask.
Your idea or business may be built on a problem, need, or desire, but do you have a solution that actually works?
How well does your solution (product or service) work?
Does it do a good job of solving the problem, filling the need, or satisfying the desire that made people want to buy it in the first place?
More importantly, how well does your product compare to other products, competitors, or alternatives out there?
Investors know that anybody can convince (or scam) people to buy their product for the first time.
But the only way to get customers coming back for more is to have a product or service that actually works and meets their expectations.
3) What makes you different?
No matter what product or service you sell, it’s very likely you’re not the only smart entrepreneur out there who is trying to build a successful business out of it.
So, investors want to know what the threat of competition looks like.
This includes your direct competition and your indirect competition (substitutes and alternatives).
And don’t fall into the trap of saying: “I don’t have any competition. Nobody else is doing this.” 😋
The truth is, there is always competition.
It’s either you don’t know who the competition is, or you’re underestimating what they can do to you (which makes you look naïve to investors).
What investors really want to know is how you’re different from others, and how that differentiation gives you a good chance of surviving the competition.
No investor wants to put their money to a business that will be crushed by bigger or better competitors.
4) Any early signs of success?
Most investors will look for ‘objective’ signs of success before they invest in a business.
That’s how they can tell if your idea or business is really an investment opportunity, or a big load of “bullshit.”
Investors look for signs of validation, traction, or a track record of performance.
One good sign of validation and traction is sales.
How many of your products have you sold, and how many customers do you have?
If you can show a track record of consistent sales, then it proves the market wants, needs, or values what you sell.
If you have relationships with reputable suppliers, distributors, or organisations who have agreed to do business with you or support you, that’s also a good early sign of success.
If you have won prize awards, got regulatory approval, have a working prototype, had notable media mentions, or raised some money before, these will be favourable signs and green flags for potential investors.
5) How big is the market opportunity?
How big is the demand for the product or service that your business sells?
This is one of the most common questions investors ask.
Investors are interested in the size of market demand because it influences how much money they can make by investing in your business.
A big market means more customers, more sales, more growth, and more money.
But investors don’t just want to hear that the market is “huge” or “massive” or one of those hyper-optimistic terms that entrepreneurs often use.
Investors want you to “logically” estimate the size of the market with real numbers.
In our training course, The Funding Masterclass, we teach the 2 trusted ways to logically estimate the size of a market: the top-down and bottom-up techniques.
You will also learn how to estimate the key segments that most investors pay attention to: the TAM, SAM and SOM.
By showing the size of your market with real numbers, you will significantly increase your chances of convincing investors because it gives them the ‘big picture’ of the investment opportunity that your business is.
6) What is your business model?
Most ideas and businesses look good on paper, but they will never work or make any money in real life.
That’s why investors are usually very interested in your business model.
The business model is the key that unlocks the opportunity to make money in your business.
Your business model shows investors how you will create, deliver and extract value from the market.
Many entrepreneurs either don’t understand the concept of business models, or are not very good at explaining their business model in a simple way that helps investors understand it.
And guess what: when investors don’t understand anything about your business, they hold on to their money.
In the Funding Masterclass, I explain the 3 simple building blocks that make up any business model.
If you understand these building blocks, you’ll be able to explain your business model to a 5-year-old kid.
7) Do you have the relevant knowledge, skills, or experience?
A few years ago, a client wanted to raise money from investors to set up a mining business.
Mining, like some other businesses, is very capital-intensive. As a result, mistakes and poor decisions can cause huge financial losses.
Take note: investors are not gamblers.
They don’t want to give their money to a person who doesn’t understand the business, industry, or market they’re walking into.
That’s why most investors will want to be sure that you have the right combination of knowledge, skills and experience to effectively deploy their money in your business.
And it’s not just about you. Investors also want to see that you have a team of people behind you (co-founders, business partners, employees, or advisors, etc.) who complement your skillset.
Long story short: my client could not raise the money because investors were afraid that he didn’t have enough knowledge or experience in the mining business.
8) Why are you doing this?
This is one of those tricky questions investors ask.
Here’s why: if you’re at the idea or startup stage of your business, the journey will not be easy.
Investors know that building a business requires persistence and determination, and often comes with major mental and emotional pressures.
That’s why the entrepreneurs who usually last long in business are those entrepreneurs who have a strong motivation that often goes beyond making money.
So, are you the type of person who will fight and sacrifice for the business, or will you abandon the business when times are hard and leave the investor stranded?
Investors try to look for signs of passion, ambition, competitiveness and focus in the entrepreneurs they invest in.
The next time an investor asks you, “why are you doing this?”, you now know what they’re looking for.
9) How do your numbers look?
For many investors, it’s all about the numbers.
That’s how they know if they can make money by investing in your business.
Investors will be looking at key financial metrics like your gross margins, cost profiles, cash flow performance, ROI, scenario analyses, etc.
When it comes to your numbers, the devil is in the details.
That’s why you need to understand the assumptions and key factors that underpin the financials in your pitch or business plan.
In The Funding Masterclass, we teach students how to develop the 3 key financial statements investors typically look for: the profit and loss, cash flow, and balance sheet.
I also show how to present your numbers in formats that are exciting and compelling to potential investors.
10) What are you asking for?
Investors are smart people. But, unfortunately, they cannot read your mind.
That’s why you need to be specific with your ask.
How much money are you asking for?
What type of capital would you prefer, and what are the terms you’re proposing?
Many entrepreneurs don’t seem to understand the financial and legal implications of the deal terms they sign with investors in their businesses.
And some entrepreneurs make serious errors in business valuation, due diligence, and their negotiation strategy.
In the Funding Masterclass, we expose the secrets of successfully closing a deal with investors with a focus on how to properly value your business, how to pass the due diligence phase, and to negotiate with investors for a win-win outcome.
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Have you been trying to raise money on your own without much success?
We can help you overcome this problem, so you can finally raise enough money to start, grow, or turn around that business.
Since 2015, members and alumni of our program have used creative strategies to raise over $5 million in grants, equity, and debt funding for different types of businesses and projects.
Are you ready to learn and apply the strategies we’re going to show you?
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