What do investors look for? It’s the million dollar question (sometimes literally!), so it’s worth spending some time thinking about the answer. In a recent NEF workshop we visited London Business School to hear from Dr Jeff Skinner about what investors want to know before they put their money on the table.
Ideas are cheap
You’ll often hear about how ‘ideas are cheap’ - and it’s true to an extent. The world is full of people who have ideas for the next big thing and will be more than happy to tell you about why they’re the next Uber/Apple/AirBnb. Sure some of them might turn out to be on to something, but undboutedly the majority are being a bit too optimistic.
So, how to make sure that your idea is a really good one, and you're not just another misguided individual? Try asking yourself the following questions. If you can answer each one then you just might be able to convince someone to give you some money to get you started. If you can’t, then think about working out the answer, and asking yourself whether there’s more work to be done before approaching investors.
1) Why now?
As noted above - ideas are cheap and easy to come across so the chances that you’re the only one that has thought of something is exceedingly slim. So on the assumption that someone else has already had your idea - why doesn’t it already exist?
Did someone already try to do your business, but fail? Why did they fail? And why won’t you fall at the same hurdle?
When you first have that ‘Eureka moment’ it’s easy to get swept up in the excitement of having spotted an opportunity and to charge straight in to action. In fact, discovering that someone else has already attempted your business idea is almost certainly a good thing! The things you’ll learn from them will either help you avoid their mistakes (if that’s possible), or save yourself months or years of work trying to get a business off the ground that can’t succeed.
So, investors are going to ask you why your idea could be done now, when it couldn’t have been done before. What has changed? New technology? Different culture? Whatever it is, make sure you’re clued up in advance.
2) What’s your competitive advantage?
Related to the ‘why now?’ question is one about what your competitive advantage is. Assuming you have made it past question 1), you’re now left with a great business idea and the time is right for someone to take this to market. So what’s to stop anyone else coming along and competing with you?
If your idea is easily replicable by any Tom, Dick or Harry then even if your business is profitable now, it likely won’t stay that way for long. Why won’t the large established companies just copy your service or product? Why won’t some other entrepreneur just start their own business and try to do it better?
Your competitive advantage has to exist in the present, but should also be something that will be defensible in the future. For instance there is something to be said for being the ‘first mover’ - but if that’s the only advantage you have then you may soon find that bigger and more experienced competitors will use their advantage to undermine you.
The sort of things that might count as a competitive advantage are varied. It could be the relationships you have to suppliers or advertisers, a patent you hold on some technology or a strong brand.
3) Can you execute?
More than just the idea - investors will want to know about you and your team. First, are you all on the same page regarding things like vision for the future of the company and attitude to risk? If they’re not then investing would be very dangerous indeed! There will be enough external threats to survival - it’s not ideal to add internal conflict to the list!
Crucially, the investors will want to know whether or not you and your team can execute on the critical success factors. That is, can you get things done? More than anything, establishing a relationship for yourself as a team that can execute is essential.
As the title of this post suggests, investors invest in lines, not dots. You turning up on their doorstep with a bright idea is all well and good, but teams that can’t execute almost always fail. The process of receiving funding takes at least 6 months, and some times much longer. During that period of discussion investors will be keeping a keen eye on which of your targets you’re hitting and how often you fail to achieve objectives you identified as critical to your success.
Of course, there's plenty more that could be added to the list. Hopefully it serves as a starting point when evaluating your next business idea. If you have any more suggestions to add - let me know in the comments!