To make money, you need money. That’s the reality of starting and scaling a business. You need to pump money into your venture before it can reach the point where it makes you your first million.
There are a whole host of different business funding options out there but one of the most common is to seek the backing of an investor.
Before you approach an investor, it’s important to dig into the details of what they’re looking to get from a business partnership. Get to know your target investor first so you can go to them with a tailor-made pitch that appeals to their own goals and interests.
Once you understand what motivates an investor, you can then figure out what you’re going to offer them in return for their contribution to the growth of your business.
What to offer in return for investment
While other forms of business funding, such as lenders, provide money on the provision that you repay what you borrowed with added interest, investors are typically looking for more.
Investors generally want to make their money back by owning part of your business in some way. In a limited company this normally involves them owning some of the shares, also known as an equity investment.
How many shares do I need to give an investor?
This really depends on how much of your business you’re willing to offer or how much you can afford to give.
If the investor is a personal connection or somebody who is particularly interested in your business venture, they may be willing to accept a much lower percentage of equity. That can be great if you’re only looking to secure a cash injection, but it’s worth considering what this really means.
As with a lot of things in life, you often get what you pay for. Offering sums of money for a small number of shares may suggest you’re potentially dealing with an inexperienced investor.
Offering more equity generally opens doors to a higher calibre of investor who can offer experience, advice, and networking opportunities as well as cash.
What issuing shares means for your business
When you give shares to an investor in exchange for equity in the business, you don’t need to make regular repayments (like you would with a bank loan, for example). This is because shareholders receive dividend payments from the company’s available profits, so they only see a return on their investment if the business does well.
This is good news for your cash flow because you can simply use the money invested to continue growing your business until you make enough profit to pay dividends.
The downside is that now you’ll have to share the benefits with someone else! It can also make things more complicated if you plan to sell the business, or invite new business partners on board.
Will they have any control over the business?
Issuing shares is not the same as making someone a director, so the level of control they have in the business depends on what their shares entitle them to do, and any agreements that you make separately.
If a shareholder owns more shares than you, they could potentially have the power to remove you as a director.
Other benefits to offer investors
An investor will be looking to make money via return on their investment. Being offered shares in your business is the most compelling way for them to go about this.
That said, there are other things you can offer to an investor to make your potential business partnership an attractive option for them and to help you stand out from the competition.
An investor needs to be as sure as anybody can be that you’re going to make them money, but they will also need to know that working with you will be a positive experience with as little risk as possible.
Here are some other things you should be able to provide to a prospective investor to help seal the deal:
A detailed business plan
You’re going to need a solid business plan boxed off before you approach any investor because they will use this as a way to get to know your business better. Your business plan should tell the story of your business so far and its plans for the future.
- Your Unique Value Proposition (UVP): An investor will want to see your market analysis, how you stand out from the crowd, and why customers will choose you over your competitors. After all, more sales hopefully mean more profit (if the business is performing), which inevitably leads to a better return for them.
- Financial forecasts: These demonstrate the potential for profit and scalability, helping investors understand how likely they are to see a return on their investment – and when. Your projections should be as realistic as possible so you can manage expectations and maintain a good relationship with your investor. They will also need to see that your valuation of the business is realistic and attainable.
- Growth plans: Demonstrate how you are going to use the investment to grow the business and increase your revenue. This should include some key milestones you aim to reach and when, so that the investor can see you have an actionable plan in place.
This should also include some information about your risk mitigation strategy. Clearly acknowledge potential challenges you might face along the way and demonstrate how you will avoid or address them.
An accountant can help you create accurate financial forecasts so you can demonstrate growth and strategic repayment plans, and your investor might see you as less risky if one is involved.
Performance data
Anything you can provide that shows your business has a bright future ahead of it will be advantageous when pitching for investment.
Your financial forecasts should cover things like gross profit margin, revenue growth and net income. You could also consider detailing other things like:
- Monthly recurring revenue
- Churn rate (the rate at which you lose customers)
- Customer acquisition costs
- Liquidity of the business (i.e. the amount of ‘liquid’ cash available)
Exit strategy information
You could also consider including some details about possible exit strategies for an investor, although this isn’t entirely necessary. This could include options such as selling their shares back to the company in the future, or the business being sold.
Commitment and transparent communication
As well as the hard data outlined above, an investor is going to want to see some desirable soft skills too. Things like motivation, commitment and transparent communication are all critical for a successful business partnership.
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