Top Tips - Is Your Business Investable?
Top Tips – Is Your Business Investable?
At Beer & Partners we see over 3,000 business plans per year, we only take about 100-150 of those on as clients. Without doubt all those 3,000 think they have an investable and potentially highly successful business. There are cases where we may agree that it is a good business, but that alone may not be enough to make it investable. To be an investable business it not only has to light your fire but it must also work for a potential investor.
For the purpose of this article, we are thinking about individual investors or Angels. This group come from a slightly different perspective that the institutions i.e. banks, Venture Capital Firms and Funds. One thing all these parties do have in common though is the desire to make a high return from their investment.
- Is it a lifestyle business?
- Is your business expandable?
- Management team
- Commercial Viability
- Interesting – Sex Appeal
- Your personal finances
- Do you really need the money?
- Barriers to entry
Is it a lifestyle business?
A lifestyle business in this context is one that is likely to provide a good lifestyle for its management. By that we mean it will make enough money to pay a good salary, good holidays perhaps even a yacht, but not enough to enable the investor to triple their money in 3 years.
A lifestyle business is therefore a great business for the entrepreneur, but it is highly unlike to attract investment.
Is your business expandable?
All businesses start small, there is absolutely nothing wrong with that. However to enable returns you must be able to demonstrate that you and your team can expand your market and grow your business in order to service the investment and provide a return for the investor.
No growth = no investment.
It is often said the most important three points that an investor looks at are: management, management and management. This is the reality. Saying that one of the key advantages of approaching Business Angels, is they often will add their skills to the management team – not usually fulltime, but can bridge some gaps. So don’t be put off if you are missing a key team member, maybe the investor can take that role, or maybe the investment will allow for recruitment.
However the team as it stands must be credible in its own right. A management team with absolutely no experience of their chosen market is unlikely to attract the funds required. There are always exceptions; maybe you have a particular skill that will transfer to your chosen market well. But however you look at it, management is king.
Is your business reacting to a fad or will it be sustainable. Investors are looking to see a return in 3-5 years. This means the business must have a place to go, and not stagnate after 12 months.
Probably the most obvious, but again, no harm in remembering it. Your business must be commercially viable. Having a just cause, or changing the world may be highly admirable but if there is no commercial benefit it is unlikely to be investable.
Interesting – Sex Appeal
Does your business have “sex appeal” – is it interesting? Remember the investor is likely to take a place on your Board. These are successful people who are not only looking to add to their wealth, but also to enjoy life. If they are going to sit in a meeting that will bore them, then are less likely to invest that one that has some interest. Obviously we all have a very different view of what is exciting, just make sure you highlight the exciting elements of your business.
Your personal finances
It is quite reasonable for a potential investor to ask about your personal finances. If you are wealthy, then they will want to know why you don’t put the money in yourself and retain the equity. Surely you think the risks are very low? If you cannot support yourself until the business turns a profit, then you may not be able to see it through – making you a very high risk proposition. These are questions you should have asked yourself anyway prior to getting to the stage of seeking investment.
Do you really need the money?
It is surprising how many people approach us at Beer & Partners that do not actually need the money. Think carefully, money is not free, you will be giving away a slice of your business, make sure you want what you will be getting in return – cash.
If your business is self-funding, then why give away equity?
You cannot avoid it, who your competitors are, how many and how well they have done will have a direct impact on your investability. For example, let’s say you have created a new and better version of MS Office, and you intend to go head to head with MS Office. Your chances of success in that situation a rather slight. Microsoft have a bottomless pit when it comes to marketing, and competing with directly as a start-up is probably ill advised. Which in turn means your chances of getting investment are also slim. If, however, you had a product that supplemented MS Office, that would be a different story.
The other extreme, which is equally as bad, some would argue worse, it when an entrepreneur proudly states they have no competition. This generally means one of two things: either the entrepreneur does not know their marketplace or no one else thinks your idea is good. Be realistic, your product or service may be unique, but there is almost always competition, even if that competition is a lesser product than yours.
Let’s say you have come up with something totally unique that no one has thought of, or if they had, did not have your skills and ability to build it. This may sound like a great position to be in, however, you will then need to educate your market. If it is that unique, it is likely that the market do not yet know they need it – education can be very expensive.
So try to be realistic and practical. Remember success is not all about having the best product or service, you also need to be able to get it to your customers.
Barriers to entry
This is a very important factor. You have come up with a great new business; no one else is doing exactly the same thing. You then need to consider how easy it would be for another business to replicate it, assuming it is not patented. For example you have come up with a fabulous new type of cola. It tastes good, it’s healthy, it’s unique, you have retailers that have expressed an interest in stocking your product. All sounds great. But you have to ask yourself, as soon as one of the other drinks manufacturers see your product how long will it take for them to replicate it? If you can honesty say any competitor, even one with unlimited resources, will take at least 2 years to come up with the same product, then great you have a chance to establish your brand. In this example, it is probably more like weeks or a few months, in which case the market will be saturated by other similar products, some of which will be backed by a known brand.
The idea of this example is to give you an understanding. We could certainly come up with many more, real, examples, but obviously respect the confidentiality of those businesses we have spoken to over the years.
USP (Unique Selling Point)
Every new business should be able to come up with a genuine list of USPs. This is not a list of good things about your business; this is a list of genuinely unique aspects.
Maybe your product is unique, maybe the management team mix is unique in your market (that would have to be very specific, as could possibly be replicated), a patent is certainly unique.
Think carefully about these.
Depending on your business, there are times when protection is an absolute must have. An easily replicable product for example, if protected can be a great investment. And make sure you understand how patents and intellectual property works. Seek professional advice. At Beer & Partners we have relationships with some of the countries most respected professionals in this field – contact us and we will happily point you in the right direction.
Without replacing proper advice one thing we can say is that once an idea is in the public domain, you cannot then go and apply for a patent. So don’t make the mistake of thinking you can get the funding first and then look at a patent – if you have told people your idea, you will not be able to apply.
There are many forms of protection for different aspects of your business and products, patents is just one, this is why professional advice is well worth while.
This is intended to be a rough guide, and of course, there are always exceptions. Angels are after all, individuals who work with their own criteria. But as a general rule if you can tick all the above, then, you stand a very good chance of attracting the investment you need, running a successful business and hopefully, in a few years time, signing up with Beer & Partners as a millionaire angel yourself.
For more advice or to talk about anything here please do contact Beer & Partners on 0207 329 4884
and we'll be happy to discuss any queries you may have.