Shoes of the Investor

When searching for investment money, it may appear that whenever you find someone with cash in his or her pocket with an interest in investing in a new business that your search is over. However, investors are like shoes, they come in all different sizes and styles. In almost every case, they are not the right investors for you at this time. It becomes necessary to qualify an investor to make sure that their investing preferences match up with the characteristics of the investment that you represent.

One way to shift and short investors is to ask them at what stage they prefer to invest. This refers to the maturation of your new business startup. At the start, all you may have is a good idea. There are relatively few investors who will match this profile. If you are able to capture your idea in the form of intellectual property, such as a trade secret, copyright or patent, then you may begin to demonstrate the value of your business. If you build a prototype that you can physically show and tell, you have created even more credibility. It has become easier for the investor to share in your vision and possibly in the price point you have set for your investment. If you can complete a sale and generate revenue, you have moved up one more notch on the investor scale. If you can generate a profit from your sale, covering not only the cost of the product/service but also your overhead (including your salary), then you are almost to the pinnacle of maturity and valuation. Finally, you have completed a substantial volume of sales and generated a profit, you should be approaching maximum valuation. As you can see, each of these milestones represents a progression in the maturity of your business. At the same time, each of the milestones represents a decrease in the risk that is assumed by the investor. As the risk decreases, not only is it easier for you to raise your money, but you also get to increase the price that you charge for a piece of the action.

At the concept or early start-up phase, the only persons who may invest in your business are friends and family. They are betting more on you than they are on the business. They may have little or no investing experience and this investment is basically a gamble. Accepting money from friends and family is full of problems if you fail. Once you have a good design or prototype, you will probably find investors who are wealthy individuals. These individuals have typically completed a business career and cashed out with enough money to have the opportunity to invest in other businesses. On many occasions, these individuals are willing to contribute their time and experience in addition to their money. Somewhere between a prototype and commencement of sales, you will have a hard time finding any investors. There simply is no class of individuals or investment funds that match up well with this stage of maturation. For this reason, it is sometimes referred to as the ‘Valley of Death’, where promising businesses must be careful to hold enough capital to survive until they can generate sales. Once you have achieved sales, you can begin looking to venture capitalists for funding. Even among venture capitalists, there is a large degree of variety. Some will invest very early while others will invest very late. As your company matures, you will reach a point where you should qualify for debt financing. Then you should talk to banks and other lending institutions.

Not all investors will invest in the same thing. Some shoes are good for work and others are good for sports while others may be perfect for rock climbing. What this means is that you must match your business with the interests of the investor. Investors typically favor a particular industry, such as telecommunications or medicine. This means that no matter how good of a business plan you have, if it is in the wrong industry, you are wasting your time and theirs trying to get them to review it and give you some funding. Most investors will tell you what industry they prefer. Others may tell you that they invest in anything, but as a rule they will favor an industry in which they have prior work experience. Rarely will a person from the oil & gas industry invest in a software company.

You can pay a little or a lot for a pair of shoes that appear to be nearly identical. In the same way you can find two investors who will charge you very different prices for the same amount of funding. This reflects the style of the investor and their own investment objectives. Some investors are only seeking the highest rates of return. They may take on the appearance of robber barons or ‘vulture capitalists’ who take a lot and give up little. However, under the right (or wrong) circumstances, they may still be a worthy source of funding. Other investors want to make their money work. They will have set goals for the benefit of themselves or those for whom they are managing money as a service. These prices will be middle of the road and well worth considering. Still other investors are so wealthy that they really can’t use any more money. For them investing is more of a sport. As a consequence, you may get a really good deal on funding simply because the investor finds your business interesting.

Whenever talking to an investor candidate, ask them at what stage they like to invest. Ask what industry they are interested in. Ask what is their investment objectives. Ask for examples of their most recent investments and compare them with yourself. If there isn’t a precise fit, don’t spend time trying to convert them to a new funding style. It won’t happen.

Karl Dakin