Attracting Equity Investors
If your company needs capital to expand, there are many sources of capital that can meet your needs for growth and expansion that are not through traditional channels such as bank loans or lines of credit.
Equity capital is usually the of exchange of ownership interest in your company for the capital required in order to grow. The ownership interest can be in the form of common or preferred stock or any instruments that can convert into stock at a later date. Equity investing is different from traditional debt financing, or loans in that the capital that is provided to the company does not need to be repaid until the company has a qualifying event that requires them to repay the investment along with a healthy return.
What Will Make Your Company Attractive To An Equity Investor?
Equity investors are looking to invest in businesses that have the potential to pay them back anywhere from 5x to 15x ‘s their initial investment between 3-7 years. So before you start looking for an equity investment you will need to ask yourself, “Is the market I am going after big enough that my company can make enough revenue that I can pay an investor back 10x’s their initial investment in 3 to 7 years?” If you can answer yes to this question then you are in a good position to look for an equity investor.
Once you have determined your market is big enough to create the revenue and necessary margins required to pay back an investor, you will then have to show that you are an innovative company. Although companies that receive equity investments vary in industry (in other words, not every equity investor invests only in high tech, websites or apps) they do all have one thing in common, they are either creating a new market, disrupting an existing market or bridging two or more markets.
Next you will need to show that you can defend your market assumptions. In early stage startups, your market assumptions are based on selling your concept to the market you have identified. You will have to prove that If you create “X” will people buy it? Most companies that receive equity investments are the ones that can show they have paying customers, although there are exceptions in markets where large amounts of capital are required for research and development. The more sales you can create with the resources you currently have the more you will attract the attention of the equity investors and the better your negotiating position will be for the capital they are offering.
Be prepared to exit. Remember, equity investors need a return on their investment and most times that comes when you have become incredibly successful and now another company wishes to buy your business. So before you start seeking an equity investor, make sure you have come to terms with the fact that you may have to exit at some point and that your exit strategy is well defined. Examples of exit strategies are things such as initial public offering; private placement, acquisition or merger with another company or management-led buyout.
Equity Investors receive hundreds of presentations requesting funding every month. They cannot possibly evaluate every submission they receive. Therefore it is imperative that you present 9 key pieces of information about your business to get their attention with the very first sentence being so compelling that they will be excited to continue reading. Spoiler Alert!, the first paragraph should not be about your product or service. I know…shocking but true. Of course you must explain your product eventually, the first thing that will get the attention of an equity investor is that you have customers (traction), you are growing, and your market is big enough to sustain their investment. A good rule of thumb is that most early stage and angel investors will be more attracted to fund your growth than developing the product. In other words, they want to give you money to buy fuel for the rocket, not to build the rocket.
Your executive summary and pitch deck should contain 8 key pieces of information:
- Market Size and Traction (is your market big and do you have any customers)
- Problem and Solution (here is where you can talk about your baby)
- Your Business Model and The Statu of Your Company ( (how do you make money, are you making money or still in development)
- Your Marketing Strategy
- Your Team
- Your Barrier to Entry (what prevents others from copying you and taking market share)
- Financial Summary (The 10,000 Foot picture of your proforma and it should show a good “J-Curve”)
- Your Ask and Exit (You must tell an investor what you need and how they will get repaid)
Your Oral and Video Pitch
Once you have built your executive summary and pitch deck you will need to create a script that you can use for your oral presentation and a video. It is important that you do not “READ” your executive summary. Of course a potential equity investor is looking for those 9 key pieces of information, however they are also evaluating you while you are presenting. You want to show them you are confident but not cocky and that you are an expert on your business and your market. Your oral and video presentation should be no more than 5 minutes long which means you will need to PRACTICE PRACTICE PRACTICE!
You may need to present for many equity investors before you get the right one and this takes time. Each investor will give you advice and you will need to filter out what you need to do and what you should do so that you can make any necessary changes in your pitch, executive summary or your business so that you are more attractive during the next presentation. This process can take weeks, months or sometimes years. Do not be discouraged and plan for the worst case scenario. Do not be at the end of your life line in your business as you will come off as desperate and investors typically do not invest in companies that are desperate. Therefore, plan that you will need at least 6 months to a year once you start on the path so that you will be in the best position possible to get the right investment partner and negotiate the right deal for your company.
Call us at 1-800-259-0537 if you would like more information on the best ways to attract an Equity Investor.