The 4 funding fundamentals investors want you to nail!
So you’ve started a business and are looking to raise money to take it to the next level. Here are the 5 things you need to nail to have a confident conversation with investors and earn their trust (and hopefully their investment)
1. Market Opportunity
Every investor wants to know how big the opportunity is, how much of that you can obtain and how quickly. Define the size of the market and how much of this you hope to corner. This is where TAM, SAM and SOM come in.
Image credit Process Street
Investors are more interested in knowing your SOM and SAM as this is what will generate immediate revenue and is considered more realistic. They want to know how much money you can make if you were able to dominate your target market. They also want to know if this product is in a quickly growing market or riding a disruptive wave?
“A tip here is make sure you avoid using vague terms or targets, instead provide specifics that can be measured against.
This shows you have done your market research.“
Traction is tangible proof measured in users and sales that customers love your product and are happy to pay for it. This can be gathered through your various sales channels, CRM systems and social media channels. It can also be tied back to the SOM (share of market) reflecting your ability to address the target market you outlined. If you haven’t made sales yet, the key is to show traction in a way that supports the research you’ve done and shows true customer engagement with potential sales.
3. Growth Strategy
Investors want to see Focus. There is a famous story when Bill Gates and Warren Buffet were both asked what is the most important question for a business leader? Each independently wrote ‘FOCUS’. Does it look like your business can actually scale? Can you explain your unique selling point? Or, explain cost of acquisition of customers and the cost of keeping them i.e. their lifetime value? This is an area that you need to dig down into and know your numbers.
4. Financials and Projections
The amount of information you can share is dependent on the audience, the time frame and the expectations around presenting. At the very least, you should put in place a 3-5 year plan covering your current financials and your forecasted financials for the business. It’s important to project growth plans in terms of potential revenue. The reason investors want to go beyond potential profits is because they want to understand cash flow. Cash flow shows your ability to cover business costs such as salaries, reinvestment into the business or repay a loan. If you can, it’s preferable to show this year by year in charts/graphics. Be realistic about business projections or assumptions and ensure that you can explain them clearly. If you aren’t sure, then be conservative in any estimates.
Remember, everyone’s at a different stage on their funding journey so reach out to Next Chapter and ask us about the funding process and capital opportunities. We are a safe and supportive space and we want to make sure you feel encouraged and inspired to write your next funding chapter.