The five things investors look for in a business
Attracting investment can be life-changing for a business, giving you the ability to innovate, develop and grow.
A strong channel of funding can be a means of scaling your business and achieving long-term success, whilst providing you with valuable knowledge, guidance and expertise from an experienced investor.
Here are the five things that make a business investable.
1. A great idea.
Great businesses are built on great ideas.
A unique and successful idea is the backbone of an investable business, so it’s important to get clear on the problem your business solves for your customers.
To do this, you need a deep understanding of your customers’ needs and problems. Step into your customers’ shoes and have conversations to find out what matters most to them. Get specific. Listen and capture information, hone in on customers’ needs and problems and look to condense your solution into one line so it can be quickly and easily understood by potential investors.
Be prepared to iterate time and again to get a great one-liner. Ask for opinions and don’t be afraid to enlist the help of experts to get this right.
When an investor takes your deck in front of an investor committee and pitches your idea, this is the first hurdle, so craft a clear and concise value proposition to make it as simple as possible for someone else to explain your idea to others.
2. Market opportunity.
Once you have established that the business solves a problem, the investor will want to know how common the problem is and how many people are prepared to spend money on solving it.
This is called ‘Market opportunity’ and it can be split into two parts: market validation and size of opportunity.
Market validation.
If your business has competitors in the market, this demonstrates that customers are willing to pay for a solution to their problem. If a business has no competitors, investors will want to know why: it may be that your business is genuinely novel and game-changing – but it could be a solution looking for a problem with limited appeal. Ideally, a business that seeks investment will have indirect competitors who are trying to solve the same problem, but in a different way. For example, a bulletin board such as Craigslist provided the opportunity to rent out and monetise properties, demonstrating that people were willing to do such transactions on the internet. Airbnb created a better way of doing this after the market had already been validated.
Size of opportunity.
The solution may be better, but will people want to use it? Analysing the size of the potential market is important to the investor and there is a formula for estimating this potential, known as TAM, SAM, and SOM which stand for:
TAM: Total Available Market is the total market demand for a product or service. This can often be hardest to quantify. Airbnb’s TAM is ‘anyone wants to share their space’, which is obviously massive.
SAM: Serviceable Available Market is the segment of the TAM targeted by a business’s products and services which is within that company’s geographical reach. The internet can extend this reach: Airbnb’s SAM would therefore include any internet user who is able to access their website or app.
SOM: Serviceable Obtainable Market is the portion of the market a business can capture in the short term. This is the figure on which investors are largely basing their decision. At this point, founders should be ambitious but not unrealistic in their projections as you need to demonstrate a clear strategy to deliver on this ambition (or at least, come close). SOM is often shown at different points in time, so your estimated SOM in 2 years might be £3m, growing to £14m in year 5 based on certain assumptions.
Finally, consider scalability: could your business easily open another branch in a different town or country? If your customer base doubled, would you be able to meet the demand? Many startups are self-limited in how much work they can carry out; an investor who wants to multiply their investment by a factor of ten will want to know that this capacity can be expanded.
3. Team.
An investor isn’t just backing a business, they are backing the people behind it.
Investors are ultimately looking for a return on their investment. In other words, a growing business. And for a business to scale, it needs a team and a great founder to lead them.
Investors are looking for a well-balanced team who can deliver on all areas of the business, as well as employees, advisors or mentors who can support the founder.
“An investor isn’t just backing a business, they are backing the people behind it.”
4. Pitch deck.
A good pitch deck is key for conveying high-level information, piquing interest and leaving investors keen to know more.
We recommend a pitch deck of between 10 and 15 slides, with a limited amount of text on each slide. Keep it snappy, to the point and free of any spelling or grammatical errors. Ensure the design and branding of your pitch deck is on point. We recommend a well-designed PDF that outlines the key points, whilst leaving the investor wanting to know more detail.
When it comes to a good pitch deck, less is more. Investors view hundreds of pitch decks every week, so leave out the jargon and buzzwords, and don’t waste their time: investors should be able to tell what your business does and the problem it solves within the first three slides.
Share your financials.
Investors won’t fund your business unless they can see potential for a good return on investment. Clearly outline your cash flow projections and financial plan to demonstrate your business profitability.
Create hype around your pitch.
Tell an inspiring story that resonates with people and back this up with facts and figures. Talk about other investors who are already interested, if there are any.
Flatter them.
Tell them why you need them specifically above others and how you want to work with them based on their portfolio and previous successes. This might mean having a different version of your deck for different investors. Angel investors won’t have the same value add as an institution and vice versa. While they’re broadly looking for the same thing, you may need to tweak things depending on the target market.
This is also a good time to think about the raise size (ie. how much money you are asking for) and valuation (how much your business is worth): consider other businesses in your space and what they raised at a similar stage to you. If you are raising more or asking for a higher valuation, be able to justify this with a breakdown of your planned use of funds, how long this money will last and a timescale for your next raise (this is called the ‘runway’).
5. Traction.
Investors are looking for tangible evidence of demand for your product or service. This is called ‘traction’.
They need to see a Minimum Viable Product (MVP) and evidence that there is demand for this product. Investors generally need to see the idea in action, so have products to show with screenshots or a demo within your deck.
From an investor’s perspective, ideally, you can show some revenue as revenue growth is their number one priority.
If you are a pre-revenue business, think about other ways in which you can show growth and make it easier to attract attention and investment, such as user growth and milestones achieved. If you can show that your user base is growing rapidly, this may convince some investors to back your venture and get it to the revenue stage.
Consumer product businesses should be able to show proven sales and rapid growth whereas a SaaS business might need a lot more initial investment to reach this point. User testimonials are another great way of showing genuine demand for the product: enthusiasm and loyalty from customers is very attractive to an investor.
Know your cost of acquisition of customers (CAC) and the lifetime value (LTV) of those customers, or the return you get on your marketing spend. Investors want to see your CAC/LTV ratio declining ideally before they invest.
Investors are looking for tangible evidence of demand for your product or service. This is called ‘traction’.
They need to see a Minimum Viable Product (MVP) and evidence that there is demand for this product. Investors generally need to see the idea in action, so have products to show with screenshots or a demo within your deck.
From an investor’s perspective, ideally, you can show some revenue as revenue growth is their number one priority.
If you are a pre-revenue business, think about other ways in which you can show growth and make it easier to attract attention and investment, such as user growth and milestones achieved. If you can show that your user base is growing rapidly, this may convince some investors to back your venture and get it to the revenue stage.
Consumer product businesses should be able to show proven sales and rapid growth whereas a SaaS business might need a lot more initial investment to reach this point. User testimonials are another great way of showing genuine demand for the product: enthusiasm and loyalty from customers is very attractive to an investor.
Know your cost of acquisition of customers (CAC) and the lifetime value (LTV) of those customers, or the return you get on your marketing spend. Investors want to see your CAC/LTV ratio declining ideally before they invest.
We’re a collective of accountants & consultants who love helping businesses & social enterprises grow. We help business owners think differently, hit targets and set their businesses up to scale.
Credit to our funding partner Swoop for the content
AUTHOR: Kerry Dwyer, Equity Manager at Swoop
