By Matthew Cushen
When launching a product or service, a canny entrepreneur will always have a good sense of how their target consumer will react.
You’d have some insight into their lives, run some experiments to gauge a reaction to their proposition, and gradually ramp up their roll-out while responding to the customer’s behaviour and questions. Progressively making the offer better and better based on the customers’ feedback.
When raising investment, to a certain extent you need to get into your potential investor’s head in the same way. Anticipating the questions to be asked and testing out reactions. Unfortunately, in some ways it is harder, as you have fewer opportunities to get in front of investors and often only one chance to make the best impression.
If an investment raise doesn’t gain momentum with an individual investor it quickly becomes stale and less and less likely to motivate them as time goes on.
In previous columns we’ve looked at what should be included in a good investment proposal, how to value a business, what a good marketing plan looks like and how to approach a financial projection.
But however ‘nailed down’ the materials you put in front of an investor may be, they are sure to have some questions. Here are a few common questions that are worth preparing for. They might be a bit trickier than the expected ones – getting under the skin of your consumer insight, target market and what you are selling to your customers.
1. What skills, expertise, experience and ambition do the team have that are relevant to growing the business? An investor is most wary of a business turning into a ‘lifestyle’ business – one that grows just sufficiently to pay a salary to the founder(s), but without the growth needed to deliver a return to the investors either from dividends or an exit. They will want to hear that the necessary ingredients are there to grow a business to decent scale.
2. What are your/your team’s weaknesses and how are you going about filling the gaps? Everyone has weaknesses. An entrepreneur insufficiently self-aware to recognise theirs will be a huge red flag to an investor. Where weaknesses are recognised, there should be a plan to compensate for them – not necessarily immediately, but some way down the line before they become critical.
3. What can I do to help? Not every investor will be up for helping, but you should know enough about your target to have thought about whether there is anything else, other than cash, that you would value.
3. Who is the real competition in this space? No investor believes those cliched matrix diagrams with a list of competitors and a list of benefits – where every benefit has a big tick under your product and loads of gaps under the competition. Even a product creating a whole new category has competitors, as every consumer could choose to spend their cash and time elsewhere. Be super critical and objective about your strengths and weaknesses and those of your competitors, both close in your space and beyond.
4. Who do you most envy? Some investors may get a little more creative in asking about the opposition, forcing you to look for and describe the positives in competitors’ offers.
5. How are you spending the funding? It shouldn’t be a surprise that an investor will be interested to know how you are planning to spend their cash. They deserve to see some reasonable detail for the next 12 months, as at least this is one area where the business is in control. They will generally be very wary of a high percentage being spent on salaries, particularly for founders. They will be pleased to see funds spent on new IP and on working capital to fund expansion.
6. What’s your ‘runway’ until your next round of investment and what can you prove before your next round of investment? A decent cashflow projection will show when the next round of investment will be necessary. An investor will be interested in what can be proven before the next investment round is started and what increase in valuation is therefore likely. It’s worth considering that it takes at least three months between starting an investment round and getting the cash in the bank. So if the cash is needed in 12 months’ time, there will only be nine months to create the proof points. And maybe you won’t launch your product for six months. So what can be achieved in the three months left? This is where you might need to get creative. For example, maybe a retailer should create a pop-up shop to start proving demand whilst the real shop is being kitted out, or maybe business with a new product would need to express manufacture some product even if the costs would be unsustainable in the long run.
7. How do you justify your valuation? I wrote about this in a previous column titled The black art of start-up valuation. There are many ways to consider a valuation. The more objective the rationale, and the more benchmarks that can be referred to, the better. If things get sticky, it’s useful to turn this question back to the investor and ask them how they would go about valuing the business?
8. Where are the risks? An investor is likely to be looking for reasons not to invest and stress testing those. You can help them and yourself by identifying the risks and describing the actions being taken to mitigate them.
9. Have you got your SEIS/EIS advanced assurance? A super simple one to finish off. Having your SEIS3 or EIS3 already processed will give an investor confidence that you fulfil the criteria and are buttoned around the administration of your business. So best get ahead and sort this out as soon as you think about raising funding, as HMRC will take a few weeks to process the application.