Being successful in securing equity investment from private investors is about more than just the nature of the deal, the team, the financial viability, and the supporting market data.
Paul Lange, founder of The Hedonist Entrepreneur, Exit Strategist and Investor, said you also need to understand the mindset of investors — because it should influence everything you do to present your deal in the best possible light.
“The bottom line for securing investors is a lot of common sense, some good timing and keeping it real,” said Mr Lange.
Here are his five steps to securing equity investment for any business.
1. Understand who you are pitching to
An investor uses their capital or leverages their assets to grow wealth by using the work and effort of others. This means an investor wants their money working for them, instead of them working for their money.
They take an informed decision to put their money at risk for a limited period, after which they want it back to reinvest elsewhere.
Show them how your proposal will make them money, how the risk is balanced, how they will receive their capital back and the upside for backing you.
2. Put yourself in the investor’s shoes
Most investors will have some core thing that is important to them and they may focus on opportunities from various industries that satisfy that. If you can identify what is core to a specific investor you will have a better idea of your chances of success, and may be able to structure the offer to suit both the venture and the investor’s interests.
3. Get the value right
There is no one solid way to value a company. One party will use one rule to justify their ridiculous asking price and the other will use another to justify their low-ball offer. When you say to an investor you are offering 20 per cent of the equity for one million, you are suggesting that the company has a value of five million, right now. No matter how you choose to value it, your company is only worth today what someone is prepared to pay for it today, or for the piece of it that you negotiate to sell to them.
4. Check your list before you go to an investor
Do you have the information that’s needed? While there are always common elements to due diligence processes, the contents of due diligence lists vary from one investor to the next, the industry being targeted, and the type and size of investment sought.
You will almost always find headings such as compliance, corporate structure (legal and capital structure), material contracts and agreements, financial data, management and employees, markets and competition, products and production, assets (property and non-property), information systems, intellectual property, tax status, litigation, environment, health and safety, regulatory compliance, joint venture agreements, channel partners, and insurance.
Other items that were once scarce or at best less common and are starting to gain attention are social responsibility, giving, and performance and talent leadership.
Don’t start until you are prepared and able to answer these questions, or until you have a plan to be able to.
5. How to speak to investors
If you’ve made it into the room, it says something about the value of your proposition to the investor. An investor’s most valuable asset is their time, so do not cause them to waste it. Know your stuff, be clear and articulate. Practice your pitch, identify as many questions and objections that you and your team can think of, and then document and practice your responses. Then practice again until you don’t make mistakes.
6. Keep it real
If you’re upset or disoriented that the title of this article says 5 steps and this is number 6, you’re probably not ready to pitch to an investor. Alternatively, you could just see this as a bonus insight. When you start to adopt the mindset of an investor and think like they do you will look at your opportunity differently. As the late Dr. Wayne Dyer said often “If you change the way you look at things, the things you look at change.”
Know the extent of your own capabilities and be honest about them. Find people who complement them and build a killer team that gives investors the confidence that you can pull off what you propose.