When it comes time to grow and scale their company, small-business owners are increasingly looking to investors as a means of securing that much-needed extra capital. Attracting an investor – whether it’s a private equity firm, venture capitalist or angel investor – is no simple task, and it takes a great deal of time, legwork and patience.
However, for many companies – particularly those with large-scale growth goals – finding outside funding can be the key to their growth and success. But what steps can small-business owners take to make their company more attractive to prospective investors?
First and foremost, small-business owners who are positioning themselves for funding should know their company inside and out – from its industry and target market, to growth opportunities and the latest trends. In addition, they should gather information about their company’s competitors and have a thorough understanding of what sets their business apart from others in the industry. Not surprisingly, prospective investors look for companies that have researched their market, uncovered loopholes and created a valuable solution to a problem.
When it comes to attracting investors, solid numbers are an integral part of the game. Small-business owners who already have their company up and running should develop a history report detailing its financial performance for at least the prior three years, if possible. It should include a balance sheet, income statement and cash flow cycle – all of which are key factors used by prospective investors to assess the financial position, profitability and growth potential of a business. Although putting together a history report can be a big undertaking, it serves as an invaluable tool to help entrepreneurs secure funding for their company.
Before creating a history report, small-business owners will need to get their financial house in order by eliminating or reducing any unnecessary costs, such as certain equipment and services, overhead and labor expenses. Although it may seem counterintuitive, every dollar that can be added to a company’s profit will help to increase its valuation to prospective investors. And by demonstrating careful financial control and maximum cash flow, small-business owners will be positioning their company as a worthwhile investment.
When attracting investors, it’s important to focus on boosting investor confidence in a company. An effective way to do this is for small-business owners to hit or exceed their annual budget – particularly in the time leading up to and during the fundraising process. If a company fails to hit its projected numbers, investors may start to second guess the entire transaction. On the flip side of the coin, if a company exceeds its annual budget, investors will work to close the transaction as quickly as possible – afraid of losing out on the deal.
When evaluating whether a company is worth investing in, one of the first things that a prospective investor will look at is its leadership team. For that reason and more, small-business owners should focus on building a strong, effective team that knows the ins and outs of both their company and industry. From leadership within the business to an influential board of advisors, this team should be comprised of highly talented individuals who each bring distinct, essential skills and perspectives to the table.
When portraying a business plan to investors, it may be tempting to load it up with complex concepts and fancy jargon. However, this unnecessary clutter can actually convolute the message, vision and goals of a company. It’s important to keep in mind that, in this case, less is more. Although a business plan should certainly be thorough – covering everything from business strategy and products/services, to market analysis and sales predictions – it should also be clear and concise. To further simplify this information, small-business owners can make use of visual aids, such as charts and graphs.
Last, but certainly not least, small-business owners will need to do research on their prospective investors. Many companies fail to obtain funding simply because they didn’t take the time to get to know and understand the investors they are pitching – a completely avoidable issue. Just as an investor evaluates whether a company is a worthwhile investment, the company should also determine if an investor will be a good fit. This requires gathering information on the types of companies and industries that an investor has already funded, as well as ensuring there is a cultural fit.
Although bringing investors on board is a great way to take a growing company to the next level, it’s important to keep in mind that raising outside capital is not a “quick fix” – it requires a great deal of research, planning and strategy. But by taking these key steps, small-business owners can position themselves in the best light for attracting prospective investors that are a good fit for their company and growth goals.
Contact Evolution Capital Partners at (216) 593-0402 or by using our online contact form.
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