Funding Column

 

What Investors Want to Know

 

By Andrew Laver

 

When interacting with potential investors, it is important to understand their perspective. In my experience, most early stage investors have three primary questions in mind when evaluating a new investment opportunity:

 

What Is It?

Assuming you know your technology, product and company better than anyone, this is probably the question you will like the best. Start at a medium to high level and make sure to give the investor context by explaining the problem or need in the market that you plan to address. Avoid the minutia. Understanding your product or technology well is obviously very important, but do not spend so much time presenting the technology that you neglect other areas that are at least as important.

 

Why Is It Better Than Everything Else?

It is imperative for an entrepreneur to understand the competitive landscape. You must be an authority on existing and emerging competitors. If you think you do not have any competition, you are wrong. Even if you have the most revolutionary technology in the world, there is always competition. If nothing else, you compete with other, perhaps completely unrelated, products for business or consumer budget dollars. Make sure you understand your competition and how your company will differentiate itself. Never tell an investor that you do not have any competition.

 

Will I Make Money If I Invest?

To an investor, this is the most important question. Unfortunately, it is usually the question that entrepreneurs do not answer well. While investors sometimes fall in love with particular technologies or management teams, they are always concerned about the bottom line. An investor's bottom line goals are most likely achieved with companies that have: 1) excellent management teams; 2) strong sales and marketing strategies; 3) reasonable valuation expectations; and 4) attainable exit strategies.

Management teams are crucial. It is not unusual to hear a venture capitalist say that he or she would much rather have an "A" management team with a "C" technology than the reverse. Investors know that management teams, not products, generate returns.

Sales and marketing is often the weakest area in a business plan or in other communications. You must have a solid plan to market and distribute your product. You should be able to compare and contrast your plan with how companies in your industry, and other industries, have been able to market and sell similar products. Never assume that a great product will sell itself.

Early stage companies are extremely risky. Consequently, an early stage investor will expect a higher return to compensate him/her for the elevated risk. Many investment firms target a five- to 10-times return on invested capital in only a few years. You need to understand this fact, and may need to temper your valuation expectations.

You should also be able to explain to an investor how he or she will get his or her money back. If an investor cannot achieve an exit within a reasonable time frame, all other factors are irrelevant.

 

If you are well prepared to answer these key questions, you will significantly increase the likelihood of a successful financing.

 

Andrew Laver is the founder of APL Capital Advisors (www.APLcapital.com), a boutique investment bank providing capital raising and merger & acquisition advisory services. He is also the co-founder and managing director of Salt Lake Life Science Angels (www.SLLSA.com).

 

Launch - Mar/Apr 2007

 

 

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