If your company is having trouble attracting investors, clarify your business plan.
That tops the list of suggestions offered by a Chicago businessman to owners seeking capital.
In a paper presented at an industry workshop, Andrew S. Whitman, managing partner of 2x Consumer Products Growth Partners, outlines 10 reasons investors decide against financially backing a company. He also suggests steps entrepreneurs can take to solicit investors.
Whitman warns that having a cumbersome and difficult-to-decipher business plan is the most basic reason potential investors decide to hold onto their money.
“Try to tell your story in a concise and compelling way,” he advises. Whitman suggests a brief executive summary with summary financials included, 10 to 20 slides and an easy-to-follow spreadsheet.
“It takes a lot more work to be concise, but it’s worth it.”
It also helps to do research to ensure that the specific investor whom an entrepreneur pursues is in fact the right one for the given company. For example, an institutional private-equity investor, says Whitman, has a very different threshold for backing a company than that of friends and family.
Providing investors with detailed information on how their investment will be used and what benefit they will receive is essential, Whitman says. In doing so, he says, he prefers to feature gross margin and velocity growth. The latter is also known as store sales or sales per point of distribution.
2x Consumer Products Growth Partners works with founders and management in emerging consumer-products usinesses that have the potential for expansive growth with the help of capital and management expertise. The firm works in the areas of food and beverage and personal, home and pet care.
Whitman advises that companies seeking investors focus more on sales per point of distribution rather than on the breadth of distribution (i.e. expansion). That way, he says, investors will view the sales per point as an asset instead of a liability.
In addition, entrepreneurs who take the time early in the process of seeking an investor to determine their gross-margin level will be better off in the long run.
“Even when subscale, gross margins need to be sufficient to avoid significant operating losses in the early days and leave enough funds ‘below the line’ to build a branded business from a marketing and sales perspective,” he says.
There is nothing worse, Whitman says, than an entrepreneur who is unfamiliar with the most basic parts of the company’s financial statements.
“While most investors are not expecting founders to know the finest points of their financials the way a CFO with 30 years of experience might, know your numbers and understand the pressure points of your business (e.g. break-even point and what it takes to make your business profitable if it is not),” Whitman says.
Three additional reasons that investors walk away from entrepreneurs are “betting on the come,” “mismatched returns,” and “failure of confidence.” Whitman says small- and medium-size rapidly growing companies will plan to have parts of their business – new products or services – come online in the future. However, those aspects of the business shouldn't be the basis on which an entrepreneur seeks capital.
Investors are most comfortable when most of the core offerings…are already developed,” Whitman says.
Whitman also suggests that founders make sure they’ve looked at the return potential from the prospective investor’s seat, including assumptions of further dilution down the road, if additional capital is to be raised.
Also, credibility is difficult to rebuild, so entrepreneurs should be careful when making projections – whether conservative or not – on how fast they expect their company to grow, he says.
Companies can more easily attract new investors by making terms and agreements with current financial backers simple and clear, he says.
Finally, Whitman reminds founders that no matter the level of funding an investor pours into a company, it will affect how the founder operates, so he advises entrepreneurs to thorougly get to know their growth partners.
But lengthy negotiations can prove detrimental, Whitman warns. “Deal momentum is important to capitalize on, and deal fatigue often proves fatal.”
For more information, visit www.2xPartners.com.