How to Make It Easy for Investors
Numbers, money, numbers, make them trust you
You managed to create a company from scratch, attract clients, diversify the company, and get to a breakeven point stable enough to adapt to a cycle. And then, as a consequence of those achievements, an opportunity arrived, a risk, a new fantastic goal, and your company is the best for that project, but you need help: 💰🧮. To whom, what do I say?
An investor will become a partner, part of your team: What does this new partner have that will benefit the company, and this moment? Whatever the reason is to inject money and give a percentile in exchange, it’s a decision based on two opposite things: numbers and intuition, both ways, yours and the investor.
Numbers are smart; intuition is personal. As a company, before looking for help, you must forcefully know your numbers:
- How much is my company worth?
- What percentile can I give in exchange for the money I need?
- How much does that percentile’s worth that will be in the hands of someone who’s not me?
- Is it fair what I’m asking?
And the investors will ask you these questions:
- Gross Margin
- Net Margin
- Net Profit
- Gross Profit
- Sales (the last 12 months and probably the previous years)
- What do you sell, and how? They must like your project or be interested in the area.
- How much will you sell next year?
After listening to your numbers and the way you sell, your next partner it’s making a decision this way:
Every year I will take this #% percentage from the profits #$ and it will take me this number of years to regain the investment I did. If I take a credit to pay that investment that the entrepreneur is asking me, the bank will ask at least for a 10 % of the total investment and I must give back to the entrepreneur the percentage I got for staying in the company, so that percentage the entrepreneur is offering must cover for the 10 % for the bank plus what I must pay back in order to have positive numbers.
After analyzing your numbers, they’ll check if it is worth it and if they don’t have a conflict of interest, like owning a business like yours in their wallet. They will also strategically see the talent they can provide to your company.
And so the game begins, while you are explaining your numbers, they are studying you to find their answer to their intuition: Is this entrepreneur worth the time? After that, the investor can give you a counteroffer, accept your deal, or reject it.
While you are listening to their proposition, it will be your turn to prepare your intuition and based it on how they behave with you, what they think of your business, and reaffirm that they are the right talent for your mission.
Important reminder: the percentage you’re asking must be equivalent to the total cost of your company. That is to say, if 100 % of the company is worth $25,000 and you are offering the 15 %, then that 15 % should value $3,750, and that’s what you should ask in exchange. A standard error, prevalent, is that we find out how much money the project needs, and after that, we intuitively say that 30 % is a generous amount. Normally these valuations exceed the total value of the company.
No, the investors are looking for real numbers, the ones happening as they speak. They are expecting your profits and sales to convince them. While you pitch your idea, they make summations and multiplications, so when you get to the part of the money, they already know how much you will ask. After you tell them the amount, they already know how much time will take you to return their investment.
When investors find a person who knows their numbers, makes quick decisions, has a big vision, and their feet on the ground is challenging to say no. If not being the perfect candidate like the one mentioned, it will be enough to be honest with your numbers. If you have loss or debt is essential to note it. Remember, the investor will become a partner, and this person has more experience than you; this should also count in the percentage offered. The relationship investor-entrepreneur should have correct chemistry, trust must exist, and the communication should be pleasant.
Preferably do the valuation by yourself because when you write production, you think of the people who work in that area and their needs; when you write materials, you know the providers and that you have to receive them every Monday morning. It’s those details that make all the difference in the balances. They remember that there is a person in charge of that company humanizing the numbers.
Contrary to a financial professional will only make a balance where it will make you look like you wear a tux every day when you are still wearing the same jeans from 3 years ago, and the boots that allow you to walk and get dirty without a problem.
Even though they have to rely on numbers, the investor was an entrepreneur once and understands your position of asking for help; they see your passion and the confidence in your company, so if they ask many questions, it’s for a good reason. Remember this a deal, both parties must win something, and it’s not only money; you can also ask away about their experience and what they have to offer to your company.
