At various stages of the company’s growth and development you as founder will attract different kind of investors and they will have different expectations.
- To begin with generally founders raise money from 3Fs (friends, family and fools). 3Fs have sole intent in helping the founders and have faith in their capability. Then comes the angel investor who is taking on the most risk by investing when the company is in early stage and has yet to generate much revenue but prototype is made or and have beta users or few paying customers.Angel investor looks to make 10-20x for their investments and its justified since they take major chunk of risk. In general angel investor will sell out during one of the subsequent financing periods. Very rarely does an angel investor stay on board until the company reaches maturity.
- Venture capitalists come in later but still before the company is cash flow positive or about to breakeven. Therefore, they typically want returns of 5x for a period of 5-7years. Mezzanine financiers provide a mixture of debt and equity to more stable and established businesses so they expect blended returns of 30-40%.
2. Pay off time –
- Very few investors wish to wait indefinitely for their money. They are investing not to make you feel good but because they believe in you and your business and the ability of the business under your management (and sometimes with their additional efforts) to generate enough revenue and cash flow and/or grow large enough in value to return them their investment and their expected return within a specific time frame.
- This varies based on the investor. Angel investors prefer a shorter period of time (3 years). Private equity funds typically expect 3-4 years. VCs tend to derive a number of benefits, so their investment are longest with a period of 5-7years.
3. Management Team
- Investor looks for great team and founder who can spearhead the vision. There are many great ideas out there. It’s not so much the idea that counts but the ability of the management team to capitalize on that idea. The management team is the most important component. A great management team can make a good idea or a so-so company into a great company. But a great idea may never make it off the ground with poor management and a great company can go rapidly downhill with mediocre management.
4. Company Valuation
- You shouldn’t look like a fool while approaching investors without knowing the worth of your company. Spend some time do some homework, check with your fellow entrepreneurs or hire a finance consultant to evaluate the base valuation of your company. Would you know if the investor is proposing a good price for the portion of their investment? Sometimes angel investors aren’t highly financial savvy and can’t do their own valuations. You need to demonstrate how their investment will help move your business to the next level and they will be keen to know how requested investment amount was deduced. VC firms will do their own valuation but you should be ready with yours and this will facilitate your negotiations with these firms.
5. Business Plan
- Business Plan is a critical component and investors look into it quite seriously. Good business plan should cover an overview of the market, Gap/Paint points in the market, your proposed solution to address the gap, background on the business, industry and competitor assessment, management overview, sales and marketing plan, risks, financial snapshot, goals, and the strategy to accomplish these goals. Some investors only want to see an Executive Summary – 3-5 pages – to determine if they’re interested. Then, once they’ve expressed full interest, they’d like to see the complete business plan.