Knowing how to approach investors is not the only thing you need to know when you meet with an investor. Investors like to see numbers and you need to be well prepared if you don’t want to get blown out of the water. Usually, when you meet with an investor, an investor will ask you several questions that can cause you to either win the investment or loose the investment, depending on how you answer these questions and how well you can defend your answers.
How much money are you asking for and what will you use it for? This obviously will be the first and the most critical question an investor will ask you as he starts the meeting with you. How you answer this question can be very critical. If your figures are wrong and your answers don’t seem confident to the investor, you can kiss the funding good bye. So, what can I do to have the best chances to win the investment that I need for my company? When preparing your business plan, you should think about spending money to hire the right people and obtain the right resources to have a good realistic prognosis that investors can be interested in. The first thing you should do is to hire an accountant and legal counsel. What? Why do I need a lawyer for? Companies need to be registered and need to have a legal definition. Legal definition is usually the abbreviation that follows your company’s name, such as LLC, Ltd., Corp., etc. These are usually the legal titles in the United States. Other countries can have different legal definitions for companies, such as GmbH or AG in Germany, OOO or OAO in Russia, s. r. o. in the Czech Republic, etc. A good business lawyer can find the best legal definition for your company, which investors would like to know. The accountant should be hired to balance the books and have all the percentages of your company well balanced and clearly defined.
The accountant can create the spending plan for the capital. This is very important. When starting a company, you will have many expenses, that the capital is to help finance. Furthermore, an investor will not give you a $3 million investment in one lump sum. You have to have a set of milestones that you will have to meet. You will be given a tranche of $50 to $300 thousand that will be used to accomplish each milestone. Only once a milestone is met, will the next tranche be issued. So what do you need to do with each tranche? Well, this is where the accountant plays an important role. You need to show the investor that you can balance the budget. Even when you do win the investment, if the investor sees something that is not right and milestones are not met efficiently, you might not get the next tranche. This is important. You need to have a percentage for monthly salaries, a percentage for product development, a percentage for real estate, etc. All this needs to be clearly mapped out.
What is your company’s valuation? Another important question that you need to answer correctly and have realistic figures for. If your figures are too high or you deliberately hype up your figures, investors will catch on very quickly and see right away that you’re not serious. If your figures are too low, the investor might see that there wouldn’t be any value and wouldn’t be worth their investment. Your accountant should be able to make these projections also. Investors are very savvy in forecasting the markets and basically take risks if the market potential is there for them to make a great profit from their investment.
Knowing this, you need to have your company valuated realistically with realistic figures that investors can relate to and your analysis should be very accurate and coincide with the investor’s analysis. This is very important. If anything is wrong with the valuation data of your company, the investor might either deny you funding or might make you work on it even more to get it up to their standards.
What’s your exit strategy? Investors invest in your company to make a profit, not to be charitable. This is why you need to plan for an exit strategy. Most investors, especially your classic equity investors, such as venture capitalists, will want to invest in your company for a certain period of time and then they want to make an exit and collect their profits. This exit strategy can also be known as a liquidation event. There are several options for exit strategies, but you should keep all your options open when planning your exit strategy. Keep in mind, that though an exit strategy is important, you should focus more on building a valuable company that can generate a large amount of revenue. There are several exit options that you can choose from below.
IPO or initial public offering, is one option. This is usually when a company is prepared to go out to be publicly traded on the stock exchange. To prepare for this, your company will need to get mezzanine funding, which is usually used to balance the company’s books to have it set for public trading.
Management Buyout is a strategy that is a slow sale process of a company. Management buyouts are usually done when the management of a company and either an investment firm or another company work together with the ultimate goal of one company buying the other out.
Leveraged Buyout is also where a company is bought by a financial institution or another company by the buying company leveraging the buyout via a particular debt or a condition for an investment.
These above mentioned exit strategies are not the only options, however. Other exit strategies can include mergers, buy ins, recapitalizations, and more. You might not know what can be the best strategy at the time of the exit, this is why it should be kept open.