What Would Make Me Invest With YOU?

I was approached the other day by someone looking for investors in a new business asking “what do you consider?”  Essentially, they were asking “what do I have to do, say, etc. to get you or someone else to invest?”  You’ll hear lots of different opinions about “what investors are looking for”, and mostly those generalizations aren’t worthwhile because investors come in all shapes and sizes, about the only completely predictable group of investors are banks, who are really lenders not investors, but that’s another matter.  The lending criteria of banks isn’t the subject of this conversation though.

The point is any business idea can get funded regardless of what rules it may appear to break or not, simply because of the range of investors.  For example, it’s common to get friends and family to invest in a new company (please note I’m referring to a new business here as somewhat different from what I’d define as a start-up, which is more the game of silicon valley and angel investors) and family will invest in some cases based on helping family members not based on a solid investment criteria.  This being said, it isn’t a reliable way mindset to take when seeking investment and there are definitely things to do to increase the investment potential.

Let’s start with the basics; investors are looking for a return.  In other words the basic law is “capital wants to grow”.  Your job in seeking investment then is ultimately to persuade the potential investors that their capital will grow by investing in your business.  The corollary of this is they don’t want to lose money; preservation is a necessary part of production.  Yes, you can convince them what you’re doing is cool, or visionary, or any number of other things, but from an investment standpoint there are the core elements of mitigating the risk of loss while offering a reasonable, ideally great, rate of return.

Essentially, you need to demonstrate how you’ll generate sufficient profits and growth in shareholder value relative to the capital invested.  What does this mean?  If you’re losing money most likely so will the investors so the investors are going to want to know how you’ll make money, the more of it the better.  There are rare occasions where you can lose money and make it up when selling the company but that’s a different game and we won’t discuss it here, so let’s focus on profit, which is the heartbeat of sustainability and growth.

The obvious piece that follows is your costs will be lower than your revenues, which means you’ll need to be able to show both how your costs will be manageable and your revenues will be strong.  This is where a potential investor had told the particular individual who was asking for advice “if I invested in your business I’d have to know where every penny was going”.  This was much to the ire of the person looking for the investment and all investors are different but it belies an important point.  You should know where every penny is going in order to better manage the use of someone else’s money.

The most important thing is proving sales.  This is why it’s so much easier to raise money after you’ve gotten started than before and one of the best ways to raise money when possible is to go get some sales (pre-orders) and then take them to investors saying “look, I’ve already got these pre-sales, I need financing to deliver”.  If the numbers work that can be a slam dunk investment.  This is also where if the investor is a potential customer you’ve got an advantage.

There’s something more important than all of this though, which was the message I delivered to this individual and it might sound harsh but it’s worth noting.  I often meet people struggling to raise money, they often think it’s because they don’t know the right investors or don’t have the right pitch etc. and those things make a difference but not nearly as much a difference as this thing.  Money is attracted to growth, the moment you’ve proven you can provide consistent returns you’ll have little trouble raising money.  Think about it, it doesn’t matter what it’s for, Warren Buffett would have no trouble raising money, purely because he’s Warren Buffett.  This is why the United States has a virtually unlimited borrowing capacity because the United States is very credit worthy.  In other words you are the biggest factor in whether you can raise money.  What I told this person is I probably wouldn’t invest in them no matter what because it was them doing it.

This isn’t to be mean; it’s simply that the person had absolutely zero business experience.  They don’t understand costs, or marketing, or management, or leadership, or team building, or operations, or assets, etc.  In other words I know they are going to go through a huge learning curve in growing that company and I’m going to have to pay for that learning curve as an investor.  You have to learn before you earn and I’m not earning on someone else’s learning.

Does this mean they can’t make money?  No, certainly not, they might well succeed and I hope they do, but it’s very high risk because of their lack of skills.  Does this mean no one who has never run a business is worth investing in?  Certainly not, the question isn’t whether you’ve run a business the question is what are your skills, often the best people to invest in are people who have worked for someone else within the same field and are striking out on their own because they know most of what they need to know and just need some capital to get started creating an opportunity to prove that expertise.  In other words you develop the expertise before you show the results of the expertise and as an investor you get a much better deal investing before there’s a track record because there’s less competition from the market (you wouldn’t get very favorable terms investing with Warren Buffett).

So, what do you do if you don’t have the expertise?

You could go try raising the money anyway and there are people out there who will invest in you if you look long enough and work at it hard enough.  But I’d recommend two other strategies the first is find a way to develop the expertise.  The best options here tend to be go work with someone whose got a business helping to grow theirs or take some training (note training not information learning, reading books doesn’t give you the skills nor does listening to talks to seminars) such as the Richucation training.  The second is to find someone with expertise to join you in an operational capacity.  What this person who approached me would need in order to get me to invest would be to come with a partner who had expertise who was going to help them run and grow the company.  They’d still have to show me a solid business model, etc. but having someone with expertise could be the make or break factor.

If you’d like training on growing a business as well as learning how to raise money please check out our Richucation training programs where we walk you step by step through the skills development and process of becoming rich.

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