When potential investors scour the marketplace for possible investment ventures, the vetting process consists of a series of checks, investigations and an extensive due diligence process to help ensure that the selected investment opportunity is the right fit. The type of investor attracted to your start-up business will depend on a series of factors, such as investment returns available, financial growth opportunities and brand identity, all of which should be extensively detailed in a comprehensive and creative business plan, complemented by an innovative pitch.
Your business plan will be the teller of all tales, detailing how you wish to breathe life into a concept, developing it into a fully-fledged business, worthy of investment. It will illustrate the direction that you wish to take your business in, your operational structure, marketing strategies, business development practices and a contingency plan. We share insight into what potential investors look for in a start-up business.
There are numerous types of investors with varied expectations and offerings, such as industry background, sector experience, market share, vested interests and investment potential. The criteria will differ depending on the type of investor, such as family and friends which are typically the first port of call as they are easily accessible, there are no intermediaries involved and it’s a low-cost investment. If your family or friends contribute significantly to your business, mitigate the risk by signing a contract detailing the finer details and clarifying expectations.
You may turn to a traditional business loan to borrow start-up finance which will have less flexibility than an alternative finance facility and there are also government grants designed to support start-ups. In return, the bank may require you to sign a personal guarantee agreement in addition to committing to repayments. If you are unable to repay your start-up loan, the personal guarantee agreement will allow the lender to hold you personally liable for the debt, putting your personal assets at risk.
Corporate and entrepreneurial investors are dedicated to investing in new talent and nurturing new businesses from their inception. Many now have accelerators and incubators to support the birth of new businesses through knowledge sharing, providing seed capital and giving access to state-of-the-art resources. Angel investors are professional investors which can also offer mentorship in addition to flexible finance.
Each type of investor will expect a financial return differing in value or a stake in the business. It is also common practice to establish a set of targets for the start-up to achieve to access further investment.
The financial targets of a start-up are likely to be modest until the business establishes the brand, actively markets to consumers and accumulates cash from sales and investments. Your financial aims are a core determining factor for investors as they will actively look to invest to generate a profit, so prepare a realistic estimation of your forecasted income and financial targets to depict investment returns.
Investors looking to actively invest will be on the lookout for a start-up with a clear and established view of the future – not a short-sighted business plan. Ensure that you cover multiple eventualities for a service extension which are realistic and within your financial means. Focus on the imminent future of your start-up and provide a view into how you would establish partnerships and focus on business development to help expand your offering, e.g. taking the B2B route to target client clusters, in addition to B2B. This journey, if successful, will help increase your market share in addition to brand development, ongoing marketing efforts and advertising.
Start-ups can formally and informally approach investors through innovative platforms, sharing their growth journey from day one, including updates and offering product trials. Online reward and equity funding platforms, Kickstarter, Indiegogo and GoFundMe are examples of popular crowdfunding sites which can assist with brand exposure, in addition to encouraging contributions from professional investors and interested individuals.
If your start-up is likely to depend on establishing an online presence for conversions, invest in web development services early in the process, such as for search engine optimisation purposes. Your public relations and marketing strategy will also indicate to the investor the level of exposure your start-up is likely to receive.
Contingency and business rescue plan
The formation of a contingency plan in the event the business takes an unexpected turn will indicate your awareness of the risks associated with starting up a business. The resilience of start-ups has been highlighted in no better way than during the coronavirus pandemic. As many have reacted fast to economic uncertainties, business growth has been inevitably limited, halting the creation of new jobs. Many young and veteran businesses have found ways to overcome the pressures of the pandemic and capitalise off new opportunities, showing how determination and creativity can help increase business prospects during unstable times.
In addition to your business plan, investors will be interested in the business driver as the success of their investment will initially lie with you. The approach you take to interact with investors will help shed light on your mind-set and risk appetite. Taking a business idea and developing this into a tangible entity requires patience and willpower, in addition to industry experience to help you make decisions in the best interests of the business. Investors are interested in ambitious start-up owners who have the passion to inspire others with their business vision, helping to build a strong infrastructure for the business.
During the vetting process, you will receive constructive criticism, helpful suggestions and recommendations, instrumental to the success of your start-up. Keeping an open mind can help give you the flexibility to steer your business in the direction required to secure investors, taking into consideration the industry understanding and market experience of your investor.
Jon Munnery is a partner at UK Liquidators, a firm of licensed insolvency practitioners providing company recovery and liquidation advice to company directors in financial distress, include Covid-19 business support services.1