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5 Essential Steps to Take before Sourcing Investment

Getting an investor to finance your business idea can be challenging, and to a large extent, that first meeting will determine whether you get the funds or not.

Nonetheless, the prep work you do before your first investor meeting can set you up for success and make it easier for the investor to back your business venture.

Our advice to entrepreneurs and MSMEs looking to access funding has been explained below and we hope it helps.

Solidify your Business Plan

A partially done business plan tells investors you plan is only partially laid out. Oftentimes, an investor’s first impression comes from the business plan. A poorly drafted or incomplete business plan will scare away your investors because it raises more questions than it answers. Make sure to make a good impression with a well thought out and thorough business plan or investor packet. This is especially important for pre-revenue companies who do not have any hard numbers to convey.

Run your Numbers

Some investors are more savvy than others, and some are experts in certain aspects of business. When putting together a pro forma for your company, be prepared to explain your numbers. For example, your investor may have worked in the insurance industry or have specialized knowledge in business insurance. So, if you allocate $10,000.00 to business insurance, and the investor knows that this number is not correct, then it is likely the investor will assume that all of your numbers are similarly off.

The best way to prevent this is to provide the calculations or quotes behind your pro forma numbers, or at least be prepared to adequately explain them. While oftentimes revenue projections involve a great deal of guess work, it is still important to run projected revenue numbers, if only to see what revenue you need to break even and how much profit you would make at different revenue levels.

Know your Ask

The key to getting the investment you want is knowing what you need from the investors, and knowing what you are prepared to give up. When discussing potential investment with my startup clients, it is not unusual for a client to have above-market asking prices for their businesses. This is normal—most business owners and entrepreneurs believe in their businesses—and this strong belief tends to cause the owners to overvalue their stakes.

Here, it is important to talk to professionals in the field. Not just accountants and lawyers, but other business persons in your sector. You can get a good idea of what is a fair ask and what asking price will insult or drive investors away.

Know When to Walk Away

One of the biggest mistakes I’ve seen entrepreneurs makes is not knowing when to walk away from a potential deal. It’s important to remember that not every deal is the right fit. This mistake happens most often with clients who are starting their first business, or clients who fear they may be missing out on a business trend unless they act quickly. Sometimes after trading several proposals or letters of intent for an investment, the arrangement evolves into something else entirely. Sometimes, this is caused by the fact that as the deal gets further fleshed out, unanticipated issues arise that cause the investor to change or restructure their proposal. Other times, an investor may simply decide to move the goalposts or ask for more, sensing a business owner’s desperation to get a deal done.

For example, the investor increases his or her equity ask, or adds a board seat requirement or other corporate governance restriction that give them too much power over the business.

We like to call this “boiling the frog.” If the investor demanded everything at the outset, you probably would have parted ways after the first meeting.

However, if they slowly turn the heat up during negotiation and add additional requirements over the course of several meetings, you may end up “getting boiled” and walking away with an investment deal that you never wanted in the first place.

Put simply, if it’s a bad deal, don’t take it, and the easiest way to ensure you don’t take a bad deal is to have other deals waiting in the wings. There is nothing wrong with talking to several investors at the same time – this isn’t a monogamous relationship, this is a business deal.

They are likely evaluating several investments just like you are evaluating several investment sources. Focusing in on one investor or investment group can cause tunnel vision, which can lead to business people leaving money or equity on the table.


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