Speaking of Business: Investors, prospects must court and match

Over the past few months, I have often been asked about what I look for in a company that we fund. I’ll try to paint a picture to help business owners better understand both sides of the fence.

When searching for investment money, it may initially appear that your search is over whenever you find someone with both cash in his/her pocket and an interest in investing in a new business. However, in most cases, that person may not be the appropriate investor for you at this time. It is necessary to qualify an investor to make sure that their investing preferences match up with the characteristics of the investment that you represent.

One way to sift and sort investors is to ask them at what stage they prefer to invest. This refers to the maturation of your new business start-up. Initially, all you may have is a good idea. There are relatively few investors who will match this profile.

Maturation checklist

Each of the following milestones represent a progression in the maturity of your business:

* Capture your idea in the form of intellectual property, such as a trade secret, copyright or patent;

* Build a prototype that you can physically show and tell;

* Complete a sale and generate revenue;

* Generate a profit from your sale, covering not only the cost of the product/service but also your overhead (including your salary);

* Complete a substantial volume of sales and generate a profit.

Just the same, each of these milestones represents a decrease in the risk that is assumed by an investor. As the risk decreases, not only is it easier for you to raise money, but you are also able to increase the price that you charge for a piece of the action.

At the concept or early start-up phase, friends and family with little or no investing experience may be the only persons who invest in your business. Once you have a good design or prototype, you are more likely to find experienced investors with some substantial wealth.

Typically, these individuals will have already completed a business career and cashed out with enough money to have the opportunity to invest in other businesses. They may also be willing to contribute their time and experience in addition to their money.

Somewhere between a prototype and commencement of sales, you will have a hard time finding any investors. This is sometimes referred to as the ‘Valley of Death,’ where promising businesses must be careful to hold enough capital to survive until they can generate sales.

Once you have achieved sales, you can begin looking to venture capitalists for funding. Even among venture capitalists, there is a large degree of variety. Some will invest very early, while others will invest very late. As your company matures, you will reach a point where you should qualify for debt financing, and begin talking with banks and other lending institutions.

The right match

Not all investors will invest in the same thing. So you must match your business with the interests of the investor. At this point, it will not matter how great your business plan is because typically, investors favor a particular industry. If it is in the wrong industry for this specific investor, you will be wasting your time and theirs by trying to get them to review it and give you some funding.

Most investors will tell you what industry they prefer. Others may tell you that they invest in anything, but as a rule they will favor an industry in which they have prior work experience.

You may find two investors who will charge you very different prices for the same amount of funding. This reflects the style of the investor and their own investment objectives. Some investors are only seeking the highest rate of return. They may take a lot and give up little. However, under the right (or wrong) circumstances, they may still be a worthy source of funding. Other investors want to make their money work. They will have set goals for the benefit of themselves or those for whom they are managing money as a service.

These prices will be middle-of-the-road and well worth considering. Still, other investors are so wealthy that they really can’t use any more money. For them, investing is more of a sport. As a consequence, you may get a really good deal on funding simply because the investor finds your business interesting.

Whenever talking to an investor candidate, you should always ask the following:

* At what stage would they like to invest?

* In which industry are they most interested?

* What are their investment objectives?

* What are their most recent investments? (Compare these with your business.)

If there isn’t a precise fit, don’t spend time trying to convert them to a new funding style. It won’t happen.

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