Editor’s note: This article was first published in November 2011; its remarks that startups were all the rage and that older investors did not understand how online businesses make money reflect that moment.
Yes, the business plan matters, and it is even truer that the main reason banks turn down loan applications is a poorly presented business plan. But when you sit down in front of an investor rather than a bank manager, the business plan takes a back seat.
The reasoning is very simple. The bank manager studies the numbers but doesn’t invest his own money, he invests the bank’s, and he usually has collateral. A private investor (or investor group) puts in their own money, and that changes everything. So what does an investor look for in your business idea?
Money, returns, security and more money. Let’s not kid ourselves. Show the investor that they’ll make money by investing in your project, and it won’t matter whether you’re tall, short, fat, thin, Catholic or Protestant. The investor will invest, and not to help you out, but to profit.
1. The investor’s predisposition
An investor’s predisposition towards an entrepreneur is negative 90% of the time (if you are the one who went looking for them). Let me explain. An investor wants to invest; in fact, they’re itching to. But they know that out of 100 people who walk through the door full of enthusiasm, probably only one or two projects at most will be worth it. Many will disagree, but believe me: before you even walk in, you’re 90% of the way to a “no”. So focus properly on how to play the bad hand you’ve been dealt.
2. An investor wants to understand your project
Startups are all the rage right now, and more old-fashioned investors often don’t understand this kind of business; sometimes they don’t even know how online businesses make money. True, an investor doesn’t necessarily have to understand a project, but they do need to be sure that the person they’re backing is a professional in the field and knows exactly how to do it. With traditional businesses, the investor will try to put themselves in your shoes, and while you’re talking, they’ll be thinking about how they would make money from what you’re telling them. Often, if they imagine themselves running the business and can’t see a way to make it work, they won’t be convinced, however much you tell them you have the formula.
That’s why you should guide them and make it as simple as possible for them. Even try to avoid phrases you can assume they’ve already heard hundreds of times this year. Some investors made their capital relatively easily. Others had to work very hard to build it, and they’re not willing to risk even the smallest amount of their money.
3. An investor looks for a sensible person and realistic numbers
Two months ago I was offered a “can’t-miss” deal. We would invest in a project that, in under two years, would earn us at least 40% a year, possibly 60%. What’s more, according to their business plan, these young founders expected to bill 2.7 million euros in the company’s second year, 3.5 million in the third and 5 million euros in the fourth.
They were young, eager and enthusiastic, but we explained why they couldn’t present their project that way. It was as simple as showing them that if they paid a 40% return, it would eat up their entire profit and more, beyond what the 3.5 million in revenue could cover, just to pay us; and even if they met their revenue targets, by the fourth year they would be more than 2 million euros in debt. All of that assuming it worked as they had planned.
My point is that many entrepreneurs try to win over the investor and forget that investors usually understand numbers far better than they do.
4. An investor doesn’t really invest in your project, but in the entrepreneur
Some people have burned through 15 million euros in 8 years. Others have turned 1 million euros into 10 million in under 5 years. There are people who break everything they touch and others who turn whatever they look at into gold.
A business plan is just an idea set out on paper, with data and forecasts that may or may not come true. In our article “Differences between a Spanish and an American entrepreneur” we gave a clear example: give some entrepreneurs a hamburger and they’ll open a couple of burger joints. Give others the same hamburger and they’ll build a worldwide franchise system called McDonald’s.
An investor analyses the entrepreneur much more than the future company. As you can imagine, car races aren’t won by cars but by drivers. You should also know what kind of investor you’re going to see, because I know of several cases:
See also: 8 questions that predict your success and that of the people you hire
– Thanks to Zuckerberg with his hoodie, Steve Jobs with his sneakers and Google with its staff of geniuses walking around the office in tank tops, when it comes to tech companies it seems acceptable to turn up to a meeting with an investor dressed any old way. In fact, if you’re received by several young investors who came up in the tech world and you show up in a suit, they may well call you “the intellectual” or “the tie guy”.
– When you go to see more… serious, formal or old-school investors, turning up in “Facebook” or “Google” clothes can come across as very, very unserious.
5. Sell your business idea, sell yourself as an entrepreneur, but don’t sell your desperation
An investor already knows you need the money to start the project. They know you’re almost certainly there because the bank turned down your loan; they already assume you’re desperate, and even if you aren’t, they’ll think you’re trying to hide it. The last thing they want to see is someone practically in tears, begging and pleading for help, because believe me when I tell you that in that situation we see everything except entrepreneurial ability. All the investor sees is a person who would crumble at the first difficulty.
Incredible as it may seem, some people still use lines like “I can’t afford to feed my children”. It’s very sad to hear that, and sadder still to see someone’s desperation, but with that line, what is the investor supposed to think? That you’ll use the money not for the business but to settle debts and personal matters. Acting this way also makes the investor focus on your problems rather than on your business idea. They may be moved in the moment, but once they cool down, they end up thinking they’re not a charity.
However desperate you are, never show it. If you believe in your project, spend that energy selling and defending it.
6. Security
When you invest in a business idea, you know there’s no such thing as security. But like people of every kind, investors feel safer knowing others are taking the risk alongside them. It’s all psychological. Nobody walks into an abandoned house in the middle of the night, but if someone braver goes with them, they’ll go in, scared, but they’ll go in.
First of all, it would help the investor to know that you’re going to put in some of your own money. It helps them to know that the entrepreneur risks losing money just as they do. That tells me, at least, that you’ll try a bit harder not to lose your money. They would also like to know whether other investors are on board.
Another reassurance the investor needs is knowing when they’ll receive the first payment. They want to know that the risk, within the risk, is somewhat under control. In short, they want to be sure that just as there’s a way in, there will be a satisfactory way out.
Most entrepreneurs go blank at a question that is sometimes asked as a test: “And if it doesn’t work out, how do we get paid?” Give a sensible answer and, if the project is good, you’ll have won some of their interest.
In short: we’ve tried to show you how the mind of someone about to invest in a project works. You should know that you are not the first to arrive with an original, innovative business idea that could have good prospects and leave the room without funding. Sometimes the investor simply goes by intuition (always assuming the project is good).
Investors have different mindsets. Some prefer innovative businesses, while others are scared of innovation because they know how hard it is to introduce a new product. Others love businesses that already exist, as long as they have added value or an original touch that sets you apart from the competition. But above all, remember that the business is you. Be a sensible person, show that you’re intelligent and that you’ll rise to the occasion. Surround yourself with the most professional team you can, and sell the professionalism of the people who will be working with you.
And above all, remember that even if several investors say no, if you believe in your project, keep trying, because the last word is yours. That said, if an investor group gives you sound reasons why your business wouldn’t work, take the message on board and consider whether they might be right.
Likewise, remember that investors go by statistics, and the statistics say that 8 out of 10 businesses are currently failing within two years of being set up. You know it and the investor knows it: show them that your business isn’t one of those eight, but one of the other two.
Further reading
- Advice for entrepreneurs from Guy Kawasaki
- 5 tips for turning your passion into a business
- The 7 start-ups selected at Linktogrowup
Featured image: Steve Jurvetson from Los Altos, USA, CC BY 2.0, via Wikimedia Commons.
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