The funding fundamentals investors want you to nail!
BY Nicole Denholder | May 27, 2020
Category : Education
Investors meet with a lot of founders who are at different stages, with different business models and varied growth opportunities. However, what’s critical to all investors is the need for founders to have their business fundamentals in place before they meet. After all, you’re asking them for their money so you need to know your business inside out.
What are the business fundamentals and which ones are most important to investors? To make it easier to understand the investor mindset, we have split this article into two sections: business fundamentals vs funding fundamentals. This should help you also go away and assess what you need to work on when meeting with investors and/or applying for different funding opportunities.
Business Fundamentals: what all investors expect at a minimum
Often times investors want to glide quickly through the business fundamentals and dig deeper into your funding fundamentals. That said, you have to get these business fundamentals right so let’s go through them.
Your Business Vision
Firstly, let’s review some of the business areas that you should have covered in a business plan, pitch deck, partner presentation etc that you can refer to over and over again. Let’s start with your vision for the business: Do you have a very short summary of what your business does and aims to achieve? Have you written it down, have you memorised it? This needs to be consistent and on point every time.
If you are struggling with this then I would suggest watching Simon Sinek’ Youtube videos to learn how to explain your businesses “Why” and “How”.
The Problem & Solution
Next, what is the problem that you’ve discovered? Who will you solve it for? What are the reasons why your target customers are frustrated with current solutions? Why is now the right time to solve it? Related to this is your solution: What is it? How does your business product or service solve the problem? Benefits of your solution? If you have research, always quote or show that to back up your work.
The problem and solution are critical areas to get right (For NCR Members, watch our Masterclass with Stephanie Ko from Gobi Partners to discuss how to make sure your product or service is essential and therefore has real opportunity to grow).
Business Model and Revenue Model
Next explaining your business model and revenue model. Many people think they are interchangeable. However, a business model explains the company’s strategy, operations and management tactics whereas the revenue model draws from these explanations to outline how the company will earn money. Our Masterclass expert, Andrew Barclay even has a list of 50 revenue model examples we can refer to. For Next Chapter Raise members, his Masterclass talks about taking stock of your finances and prioritise your costs to either get through or fundraise during COVD-19.
Who is Your Competition?
This is always a stressful question! How well do you know your competitors? Do you know your place in the market relative to your competitors? What does your product deliver that you feel is currently missing? Do your research and make sure this is true especially if you are talking to an investor from your industry.
When it comes to the team there is a lot of bias towards women. Firstly, if you are a sole founder there are key person risk concerns. If you are a sole founder and haven’t built the team, that’s okay. If you are using an investment to build the team, highlight any specific experience and skills of key team members that will be important to the business. For the existing team, explain each team member’s prior business success within jobs and other startups.
Your Investment Ask
Typically at the end of any discussion will be the question: How much money do you need? What will you do with the money? One approach is to outline the milestones this funding should help you achieve including timing e.g. 24 months. Be as specific as possible.
Key here is to be able to explain and talk to these business fundamentals in a snappy manner to keep their attention until you get to the next likely set of questions about the funding fundamentals.
The funding fundamentals investors want you to nail!
So, now you have the attention of the investor about your business, why you started and the makeup of your team, let’s get onto the funding fundamentals.
Every investor wants to know how big the opportunity is, how much of that you can obtain and how quickly. This is where you can generate excitement and a stars in the eyes moment about “what could be’. But how exactly is this done?
You need to define the size of the market and how much of this you hope to corner. This is where TAM, SAM and SOM come in. What are they?
Many people throw around TAM because they are “big numbers” that they believe will impress investors. Yet 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.“
What is that exactly? It’s 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.
Things to consider include preparing who you sell to? Which customers have used the product and how have they received it? Are customers returning? How much is each customer worth? Does it look like your customer base is growing? Don’t forget to include clients you’ve secured, distributors you’ve reached out to, new hires you are bringing on board.
If you haven’t made sales yet, don’t fear. The key is to show traction in a way that supports the research you’ve done and shows true customer engagement with potential sales. This also means demonstrating how your non-sales traction is laying the groundwork for future sales and chipping away at the share of the market you want to capture. Obviously, traction is different for every business and dependent on stage, type and industry.
When we talk about Growth Strategy, what investors want to see is 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’.
That’s what investors want to see when you explain your sales and marketing strategy to acquire and retain customers. 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.
Financials and Projections
A difficult area to cover is always Financials & 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.
Now remember to 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.
So, which fundamentals do you need to work on?
Now we’ve worked through the key areas you need to prepare when talking to investors or pitching your business. But don’t just think of this information as investor-driven, it can also help with sales and partnerships e.g. if you want advertising revenue then potential customers will want to know media reach (traction), your audience (SOM) and why you are better than your competition.
In summary, we’ve now discussed the importance of being able to clearly talk to your business’ market opportunity, growth strategy, financials & projections as well as traction to investors. We’ve also gone through the key business fundamentals to consider such as vision, problem & solution, team and competitors.
All of these will be important for investors to assess and determine if they will invest in you and the business.
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.