What is the number one reason given for sharks rejection of an investment opportunity?
“Your valuation is ridiculous!”
Too many entrepreneurs go into the tank without anywhere near enough preparation. They get excited by the opportunity, but either don’t want to do their homework, or they just don’t know how.
Preparing an investment pitch is completely different to preparing a sales pitch. You could have a great track record in your sales. You know your product, you know how to speak to your customers, and you know how your product meets their needs.
But do you know what your competition is doing? Do you know what the Sharks could gain from this investment? Have you identified the ideal investor for your business? Do you even have a plan for what you’d do with the money they invest?
The incredible thing is that these questions should be considered whether you’re looking for an investor or not.
Every day you turn up, you’re investing in your business. Every cent you spend on growing your business is an investment – and you should be thinking about these things now!
You can’t make a reasonable valuation on your business if you don’t understand these three key things:
I’ve given a quick description here on why these things are so critical to your business.
This isn’t about understanding how to sell, but about how well you’re selling. The most obvious number is revenue – how much your customers have paid you each month and each year. But you also need to think about Cost – how much did it cost you to produce and deliver the product (or service) that has been sold on to your customers? This is the number one goal of operations managers – reduce the cost of sales!
You also want to have a consistent track record of increasing sales – and a good understanding of why sales dipped if they ever did. Keep in mind that no investor will put their money in because you’ve had “good feedback” from the market. They want to see commitments, actual sales and actual contracts. You can’t value your business based on what you think you’ll be doing in the future – you’re offering a stake of what you’re already doing. Get the sales contract signed before you ask for the investment, and you can legitimately increase your valuation based on this actual asset.
Finally, you’ll want to understand the effect of advertising and promotional work – how much does it cost to generate new business with your current marketing activity, and which marketing channels are providing the best value for your business?
Of course, you’re the only one operating in your space, and nobody does what you do. You’re completely unique in the world, and there’s no way anyone could possibly compete with you. Even if this is true, you’re still in competition – for the “wallet share” of your customer’s spending money.
Every business has competition, every product has an alternative, and every service has a different option available. If you can’t understand what your customers will base their choices on, you won’t even know what you’re competing with! Ask your customers (especially your repeat customers) – “Why do you choose us?”. You could even go as far as asking what they’d do if they couldn’t access your products – but try not to inspire them too much, you want to keep their business!
Do you have patents for your products or services? Can you even get a patent for what you are doing or providing? Are you dependent on a specific provider or manufacturer that could change the rules (and costs) at any time? Is your market a fad, or is there a serious threat of disruption in your current industry (other than yourself of course)?
Do you have positive cash flow, and can you accurately predict your own success? Will you continue to grow without the investment, or are you dependent on this injection of cash to stay solvent?
And how much risk do you yourself represent? Can you demonstrate a high enough level of commitment to the venture – so much so that someone would be willing to entrust their money to you in a reasonable expectation that you can return on that investment?
And don’t be too conservative here – remember that there is always opportunity cost with any investor. If they can get a better return by purchasing shares or increasing their investment in one of their other projects, why would they put that money into your venture?
Asking for a smaller sum allows the investors to take on greater risks, but nobody wants to throw their money away. And offering too little a return will turn everyone off your proposal. Find that sweet spot where everyone wins, and you’ll find that you’ve created real competition for the investment, and you can then direct your energy towards getting the best deal for your business and for yourself.
The bottom line is that you have to consider your investment in your business from a wide range of angles before you can make a decision – and so does any other potential investor! These three areas listed are just the tip of the iceberg, but they constitute some of the most critical things that entrepreneurs seem to neglect when they’re addressing the sharks.
For yourself, start thinking more like a shark in your own business. Look for weaknesses you’d exploit, and find ways to resolve them. Look for opportunities that aren’t being taken and invest to take advantage of them. Don’t waste your time wishing for your projections to come true – get out there and make it happen!
If you’re serious about building your business through investment of any kind, get in touch with me today – I may be able to spot some areas that you could understand better and even improve before you spend that time and money.