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Build a Business That Funders Will Back
Find out what investors are looking for and boost your chances of getting business funding.
Across the globe, funders insist that there is a significant amount of capital available – what’s missing is fundable businesses. In other words, businesses that understand what funders are looking for, and that tick all the right boxes.
As a mover and shaker who’s serious about building your business, focus on these key areas to increase your chances of attracting the right funder’s attention.
Step one is evaluating if you have the track record to prove to investors that you’re a safe bet. If you’re looking for start-up or early-stage business funding, a better option might be to self-fund or bootstrap your business.
4 Things funders look for
If you’re confident that you have a business that can grow, that has customers and provides a solution people are willing to pay for, here are four investor-mindset hacks that will improve your chances of securing funding.
Funders stick to their mandates
A mandate is a set of guidelines or rules that a person or organisation follows. There are generally a number of different funding options available for businesses, but each have their own specific mandates. For example:
- Banks are conservative with their money. They require collateral and strong financials
- Venture capital firms on the other hand, will take greater risks for far greater returns. However, they want to see how you will grow the business with their money
- Government grant programmes are designed to support social projects and social businesses
It’s important to understand the mandate of each funder, and what they care about. For example, if you approach a venture capital (VC) firm that’s only interested in technology businesses when you manufacture a frozen yoghurt product, you’re not likely to get funding.
“We are a technology fund, and yet I receive hundreds of emails each month from businesses that don’t match our mandate. This wastes my time and theirs, as they could be focused on building a relationship with the right investors for their specific business or industry.”
- Clive Butkow, CEO of venture capital firm, Kalon Venture Partners.
- Every funder has its own processes and mandates, so research each specifically:
- Who else have they funded?
- What business sectors are they interested in?
- Everything you need to know can generally be found on their website and in the media, so get Googling.
Funders Want to See Up-to-Date Financials
Whether you’re approaching a VC firm, a bank or an alternative funder, you will need to present up-to-date financials. Both debt funders and equity funders need to know that you have a strong handle on your numbers. Debt funders lend you money in exchange for loan repayments. They earn their money through interest repayments added to the initial loan. Equity funders will give you money in exchange for ownership or shares in your business. They will make their money back when they sell their shares – hopefully for much more than they initially paid for them.
All funders will look at business models and strategies to determine whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or an access-to-market problem.
- Too many business owners walk into a funder’s office and expect to receive funding, even though they don’t have up-to-date management accounts, accurate forecasts or a strong understanding of their financials
- Funders are risk-averse
- The stronger your case that their money is safe with you, the better
- Start with researched-backed and carefully-considered figures to up your chances of success.
Funders want to know you’re not a risk
“We look at three things in an investment. Is the deal investable? Is the person investable? Is the risk investable? We determine this through the 4Ts: Team, Technology, Traction and Target Addressable Market.”
– Clive Butkow, CEO venture capital firm, Kalon Venture Partners.
“We need to know that the business has enough expertise in their chosen industry, cutting-edge technology, the ability to sell their solutions and a market who actually needs what they’re selling.
“We also want to see that people are willing to pay for it. If all of these boxes are ticked, we know the deal, people and risk are ‘investable’, which means we have a higher chance of seeing a return on our investment.”
- If you can address each of these key areas in your pitch (backed by figures, data and expertise), you’re far more likely to secure an investment into your business.
Funders know when you’re inflating your numbers
Many entrepreneurs are overly-optimistic about how well their ideas will do in the real world, the potential market-size of their product, how many sales they will make and ultimately, how much money will flow into their businesses. This optimism is seldom backed by data that can be held to scrutiny.
The result is that entrepreneurs pitch investors on inflated projections, believing their Total Addressable Market (TAM) is anyone who could potentially use their product.
So, for example, if 250 million people in sub-Saharan Africa have smartphones, an app developer would see this as their TAM. Their pitch to investors then focuses on percentages: If they can secure just 5% of the market, they will have 12,5 million users.
Investors are highly sceptical of such claims, because they know that most solutions cater to niche audiences instead of broad audiences. Unpacking who that niche audience is and why they will give you their money is therefore a much more compelling argument.
- Even Facebook’s founder, Mark Zuckerberg, launched his business for a niche market
- Once he had captured his initial audience he could grow the offering. If you don’t have a solution that serves 100 people, you will never build one that serves 100 000 people
- Investors understand this. They want to see how you will capture 100 loyal fans and then build the business out
- No one launches a business that immediately caters to millions
- Businesses that think so are most likely doomed to fail.