Striking an investment deal is both an art and a science. The art of it is largely what makes up the front-end of a business pitch.
This is where a business owner describes his or her idea, its potential, the market need it fulfils and the revenue brought in so far. Investors can get excited by what they hear, and the passion an entrepreneur has for the business. But the proof of the pudding is in the eating, so that’s when the science checks in.
The science can include getting researchers and analysts to provide strategic insights into the business, look at global trends and get substantial information for due diligence discussions, such as actual records of the sales claimed.
And this is where investors and entrepreneurs can fall out.
Walking away from a deal is best done early, so most investors prefer to air any dirty laundry – and this can come from both sides of the negotiating table, by the way – as soon as they can. It’s best to discover any incompatibilities long before any commitments are made.
Here are some of the red flags that would cause an investor to turn down a deal, no matter how interesting a business idea may sound.
Lack of a business plan
Before you run a marathon, you practice, check your times, carry your water and check your laces. All this preparation ensures that you can focus on the task at hand. With this in mind, why wouldn’t you want to feel as secure when pitching your business to a potential investor?
To allow for a proper analysis of your business and a positive result, you need to paint an accurate picture for an investor, and more importantly, for yourself.
In other words, approaching an investor without a business plan is equivalent to shooting yourself in the foot before a marathon begins.
You need to have a clear idea of where your business is going before you can sell any future potential to those with the power to finance your dreams.
How to fix it: Be fully prepared. So tighten your laces and plan out your route, starting off with a description of your company, an analysis of the industry and your competitors, a layout of your team structure, a definition of your product or service, a breakdown of sales and marketing costs and tactics, and honest and realistic financial projections. Finally, present your funding request, and have a clear idea of what that money would do for your business’ future growth.
Many entrepreneurs will try to make their businesses seem perfect in the hopes of bagging an investor. Leaving out the fact your business has massive debts or that it currently has other shareholders is the ultimate turnoff for investors.
Even if you manage to trick an investor at a pitch, the truth will always come out, and then you not only risk losing a business partner and mentor, but you run the risk of losing your reputation among future investors.
How to fix it: Do you solemnly swear to tell the truth, the whole truth, and nothing but the truth, even under the pain of rejection?
Take this oath before speaking to anyone that you’re hoping will finance your business. Honesty is still the best policy, as corny as this may sound. Investors will respect you more for not hiding your issues in smoke and mirrors – and who knows, your strengths may far outshine any weaknesses your business may have. Be yourself.
Investor: How often do you make orders from you suppliers?
Entrepreneur: Ummm, twice a, no, three ... no, two to three times a week. I think.
Investor: Can I see your profit and loss records?
Entrepreneur: “Ehh ... I have some receipts here and the delivery notes here, and also our cash is kept in this drawer here. The cheque book for the business account is in the car.”
You may roll your eyes with disbelief at this conversation (or blush if it hits too close to home?), but too many business owners keep messy records, making it extremely difficult for an investor to inspect and critique a company with the aim of handing over a cheque. No investor will join you on your business venture without doing their due diligence on your finances.
How to fix it: Consult an expert or a friend with a finance background if you have to, but sit down and ensure that you can tabulate all your revenue and costs from the inception of your business or as far back as you possibly can.
Organised books show an investor that you are not only serious, but also diligent and easy to work with. So set aside some serious time to get your books in order.
Lack of market trials and proof
Businesses are designed to solve a problem. For you to be sure that you have a sound business idea, you need to test your solution. Selling your product or service to family, friends, and most especially strangers who won’t hold back on their feedback for fear of hurting your feelings is the only way you can prove if it’s something worth investing in and scaling up.
How to fix it: First, ensure that your business responds to a need. Second, turn your business idea into something concrete. Even if it means running it out of your house or online, have something to show investors as proof that with a bit more mentorship and financing, you’re on to something big.