How to make your small business investor ready

Small business owners must be aware that entrepreneurs are many and there will always be competition for limited resources

Kudzai M. Mubaiwa
As we get into the second quarter of the year, it is imperative to re-look into your business and be certain that the economic model is still viable.

The most desirable situation is that a business steadily grows and this is only guaranteed when the model is solid.

Some business will recognise that they are heading in the correct direction, but lack the necessary resources to scale.

Inevitably, fresh capital will be required, often a notable amount in order to achieve economies of scale. Securing outside investment, other people’s money; is one of the best ways to fund the expansion of an enterprise.

Small business owners must be aware that entrepreneurs are many and there will always be competition for limited resources.

They must, therefore, prepare themselves for interaction with these people and institutions that have money to put in businesses, or investors; and go to the next level. Here are some important factors to consider in becoming investor ready.

Management matters for most investors, to them the people behind the idea matter more than the idea itself.

Teams, human resources that make the company work are scrutinised. It is always a good idea to ensure that in the core team, no matter how lean, you have persons schooled and skilled in finance, production and marketing.

Finance skills are required for any reputable business — someone must record and analyse the movement of money. The maker is equally important, a competent someone who oversees production of good/services. The marketer is also valuable as they secure off-takers for goods and services. The important aspects of a business must be thoroughly covered; getting the right brains working on a project is a must.

The product/service itself must be abundantly clear to investors — what do you offer as a business and what is your value proposition? You will need to help them understand the exact product and/or experience your business charges for.

Ambiguity wards off investors, if anything one should be able to describe their offering in simple terms and language.

Acquaint yourself with everything your company sells and know the specifics intimately.

Money will follow clarity and mastery, not just a product list or brochure.

Customers too are a huge issue for investors.

You must demonstrate, beyond reasonable doubt, that you know the market, can meet their needs and can reach them?

A track record of those you have served will cause you to win. Remember investors want to be assured that you will apply their funds towards a model that works and at the end of the cycle someone must pay for what you produce because there is value.

Keep a live database of clients you have served and contact details of someone who can give a positive review or reference. Happy customers will do this willingly. Be sure to give special mention of those that have given your repeat business.

Always ensure that you can articulate the profile of a typical customer for each product/service you offer — their age, gender, income level, location, trends they follow.

A marketing plan would be the natural follow on to understanding customers. Investors will want to see how you intend to reach customers and gain a sustainable competitive advantage over other companies doing similar work.

A combination of innovation, novelty and low cost — high impact initiatives will serve you well. Focus on activities that will gain good ground, without breaking the bank.

Leverage new media and technology. Research and compute statistics on how marketing efforts will contribute to the bottom line.

A powerful indicator is determining what every dollar in marketing yields in profit. This is much more objective than a generalised qualitative statement on how “marketing will help the business”.

Your enterprise will do well here to engage the services of marketing agencies/consultants that develop a dedicated strategy in partnership with your internal resource person.

It will be well worth the effort and an effective marketing strategy will gain traction many years after execution.

The marketing plan must clearly unpack the critical four P’s of product, place, pricing and promotion. Your business strategy must also deliberately build/show clear barriers to entry for other competing firms in your field.

Pricing is a matter of concern for would be investors. Finding the sweet spot between offering a high quality product whilst maximising profits requires work — a continuous balancing act informed by feedback.

Added to this is the need to adhere somewhat to global benchmarks and maintain a reasonable level of parity, customers are sensitive to price changes now and are also quite well informed about trends worldwide through the internet.

The business owner must select a pricing model that takes account of this all and still give a fair deal. Further, they must tie in the impact after investment and show how a decent return on investment can be attained.

It also goes without saying that the financials of a business desiring investment must be in order. Potential investors will always look to numbers as the most objective indicators in any enterprise.

Anyone can make up a flowery story, but numbers (assuming they are not massaged) never lie! The best investment case is always that which is a combination of a clear model and business plan (qualitative story), combined with clear numerical indicators (quantitative analysis).

Some important business performance indicators are gross profit margin — which tells you whether you are pricing goods/services appropriately.

It should be large enough to cover the fixed expenses. After it would be the net profit and net profit margin, which gives you a view of cash left over after paying all the bills and how this amount relates to total revenue, respectively.

Cash flow indicators such as the current ratio and aging accounts receivables are also useful in demonstrating your ability to pay your bills and the rate at which customers are settling what is due to you.

Keep meticulous records of past performance — a statement of income and expenditure, a cash flow statement and a detailed balance sheet. These will always prove helpful in strengthening your case when negotiating with financiers.

Finally, at a personal level, the enterprise owner must prepare themselves for investment. It is important to have an understanding that most times the way for the business to grow is by letting go of part of your ownership in exchange for funding.

The resultant company will reward you as you will share in the benefit of a slice in a larger cake rather than wholly own a small struggling outfit.

You will also need to have a resilient mind set, securing investment is a rigorous exercise and a journey that will involve a lot of highs and lows, disappointment, frustration, near-wins, shut doors, but at some point you will close the right deal.

The important work now is to introspect individually as well as institutionally. Can your model withstand intense vetting? Potential backers prefer that you apply their funds for expansion of a proven model or commercialisation activities rather than augmenting working capital. Are you truly ready for investment to scale?

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