Investors are flush with money thanks to this unique moment in history. We are living in a period of historically low-interest rates. We are far from the rates that prevailed in the 1990s and before, even when you factor in the Fed’s proposed interest rate hikes.
This is the best period to start raising money. Yet, many small business owners don’t know how to ask for investment money.
This article will take you through the critical elements needed to raise money, from writing a business plan to showing how your business is best placed to create shareholder value thanks to its superior return on investment.
Write A Solid Business Plan
The business plan is the heart of your approach. It tells investors what your business model is, your expectations but, more, and the challenges your business will face. More importantly, it tells investors how deeply you have thought about your business.
The Small Business Administration (SBA) recommends picking a format that reflects the kind of company you have. That said, a business plan is broken up into several key components:
- Executive summary: this is an overview of the contents of your business plan.
- Market analysis: it tells investors what your total addressable market and serviceable addressable market are and their characteristics. In other words, it tells them how big a market you have, what chunk of that market you hope to serve, and what it looks like at that moment.
- Business Objectives: Ultimately, a business’s real business is to create shareholder value. How you get there, however, is what makes your business unique. So communicate your business’s purpose to get the investors who will give you money and be in harmony with your business’s values.
- Strategy: Strategy is the art of navigating the competitive landscape to get the desired end. This section tells investors how you plan to bridge the gap between reality and your business objectives.
- Target Market: In this section, you address your serviceable obtainable market or the market you can get right now. These are the actual people that you want to convert into paying customers.
- Financial Forecasts: If you want money, you have to show the anticipated financial performance of your firm, with more detail in short to medium term, and then with greater generalizations, for the long term.
Make A Clear Payment Plan
There are two ways to raise money: getting a loan or issuing shares in exchange for equity capital.
Typically, startups are too risky for traditional lenders at least very early in their lives. So, the usual solution is to issue shares and raise equity capital from angel investors, venture capitalists, and even through crowdfunding platforms.
More established small businesses can also follow this route or get a loan from the bank.
In both cases, investors want to understand how they get their money back, whether through capital gains, dividends, or fixed interest payments.
Find The Right Investor
Although it is essential to raise capital, you have to work with people whose values align with yours and with whom you can have a constructive relationship.
You also have to consider your other needs. For example, some startups lack critical skills and look for investors who can play an active role in the business by providing mentorship, access to networks, and other such benefits.
Your capital raising strategy has to take all these things into account.
Prepare A Great Investment Pitch
Investors, especially the very successful ones, are inundated with investment proposals. The competition for capital is so high, and investors are so busy that you have to raise your game to stand out and get an investor’s attention. There are five critical elements of a successful pitch.
- Start with the basics: Walk the investor through the business model, its value proposition, your product-market fit, and the pain points it addresses for your customers. Then, discuss your business’ investment and innovation plans and your vision for the future.
- Give specifics: Show how your financial projections match the ambition of your vision under a very conservative scenario. You must ground your forecasts in a very traditional method so that you do not promise heaven and deliver hell. It is better to under-promise and over-deliver.
- Discuss the possibility of failure. Nothing is certain. Your investor is alive to the risk of investing, but you need to clarify what your benchmark for failure is and what, if anything, you will do in the event of failure. Conduct a premortem to determine how you would fail if you were to fail.
- Give a realistic timeline. Outline the critical milestones in your business plan. For instance, how long will it take to commercialize innovation and start selling it? When do you expect to make an initial public offering (IPO)? Your projections must be conservative. Ground your predictions in industry averages.
- Answer the Big Question. Ultimately, your investors want to know if they will get their money back plus a premium on their investment. So point to historical financial results and other objective facts to show that you can deliver.
Highlight The Return On Investment (ROI)
There is strong evidence that the returns a business delivers determine its future value. Return on investment (ROI) is a precise number that tells investors how much profit you will earn for the investment you give them.
It is calculated as net income (over a period) divided by investment (costs resulting from an investment of some resources at a point in time).
The higher the ROI, the more profits a business generates from invested capital.
It is calculated as net income (over a period) divided by investment (costs resulting from an investment of some resources at a point in time).
The higher the ROI, the more profits a business generates from invested capital.
Summary
When investors are flush with capital, startup founders and small business owners have more opportunities than ever to raise capital. However, knowing how to ask for investment money is the difference between getting a business off the ground or not achieving your ambitions.
Founders and small business owners must draft well-thought-out business plans and investment pitches with conservative scenarios that articulate their vision, business model, market opportunity, and financial prospects.
