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Why Should an Investor Invest in Your Business?

Ever watch the TV show, "Shark Tank?"  A bit over the top on both sides, but more than anything extremes are always great teaching moments. On the one hand, it shows the naivete of many of the entrepreneurs - expecting that these experienced investors will fall into a dead swoon when they hear their business concept, or asking for way too little money for way too high a valuation. On the other hand, it also puts the arrogance and greed of the "sharks" on display, beating up the entrepreneurs and trying to strike onerous deals. But at the end of the day, the "sharks" invest in businesses they think they can make money in. Nothing else.

So, why should an investor invest in your business?

Because you need capital to grow is not a good answer. Nor is a "kick-ass" business model. Or because you're such a passionate entrepreneur. Or such a great visionary. Plain and simple it's because the investor believes they can make money with your business. Period!

Now, your Uncle Bill might invest in your business because you're his favorite nephew and your next door neighbor might because he's heard speak so much about your business and figures you must know what you're doing. But once you pass the realm of the "friends and family," finding investors who will invest is a most challenging task.

Professional investors, whether they be angels, alone or with a group, or venture capital firms have a very simple objective: to get a minimum targeted return over a specific period of time. That's how the "sharks" view it on "Shark Tank." That's how professional investors view it in the real world.

So, how do you get an investor to invest in your business? Obviously, you have to show them how they will get a return. But, with professional investors you must also understand that the numbers will always be against you.There are way more opportunities for professional investors than there is money available for those investments. That said, here's some guidance to help you better overcome the odds. And remember, it is an ongoing, learning process.

Know Who You Are Pitching.
Do your homework. However you get in front of the investor, know what kind of businesses/industries they focus on and what they've invested in, previously. As previously noted, investors look at many more deals than they can ever invest in (often as many as 50 for every 1 they invest in). But they usually invest in businesses/industries where they can bring value beyond money, like contacts and potential customers. So there are a lot "courtesy" meetings where they agree to a meeting because they know one of your advisors.If your company seems to be way out of their "wheelhouse," use the meeting as a further learning experience, knowing you have little chance of success going in.

Remember You're Selling...Make Them Buyers!
Develop a "selling" investor business plan and investor pitch. I've addressed this point in a previous blog post. Make no mistake about it, you are trying to sell them, but don't make the mistake of trying to sell to them like you would sell to your customer. You need to show them how well you know your market (including the size of the addressable part of it), how well your product or service addresses that market and how you will capture it, who your competitors are, how sound your team is and how your business can scale. These should all be backed up by factual details and examples of what you've already done to prove your case.

Know Exactly How Much You Need...and How You'll Use It!
I covered this point in another previous blog post as well. No "about's," no ranges. Exhibit financial precision.We need this amount of money, to do these things over this time period. Have a small cushion (10-15%) for working capital. When in doubt, ask for more money rather than less.Always view every potential investment as the last one you might get.

Show How You Will Make Money with Their Money.
Don't just show your financial projections, but show, specifically, how you'll deploy the capital you're trying to raise and what impact it will have on your financial performance over the coming months and years. Show the investor a return on invested capital projection (if you don't know how to do that, have your accountant help you). This will show the investor that you understand what they are looking for, and translate your financials into a perspective that makes sense for them.

No Fantasyland Valuations...Have Some Basis!
This is often where the participants in "Shark Tank" turn it into a comedy show. Some of it just pure fantasy. Don't let this happen to you. Get some feeling from advisors, mentors, etc., about how the market might value your business (not how YOU might) and their basis for it, so you get a better understanding. Of course, you're trying to get the highest valuation possible, and the investor is trying to get the lowest one possible, but there's a difference. They do this for a living, so they have an understanding of what they are willing to pay, pretty early on, regardless of how you might value the business.

Why should an investor invest in your business? When you make the investor believe that your business is a good investment for them; one in which they can make money and get a solid return on their investment. Nothing more, nothing less.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!

What's been your experience with professional investors? Have you ever been in a "Shark Tank"-like situation? Include the story in your comments.It will help other entrepreneurs!

If you like this post, by all means, share it with your networks and colleagues.

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