What Investors Care About

Before you can write a plan that satisfies all the points that an investor cares about, you need some idea what those points are. The answer to this is really no secret. Investors want you to know what sort of businesses they are interested in funding. They don't want you to waste their time. Ask about investors and what they're interested in or research them in trade
or financial publications.

First, remember the one common attribute
shared by all investors: They all want to make money. This may seem obvious,
but sometimes this fact gets lost
in the excitement of your own idea. Often, investors have a portfolio of
industries that they specialize in. Even charitable groups who grant money
will want something
in return such as local job generation. Your plan needs to emphasize how your business will pay off for the investor and that it pays off in the right kind of return on ionvestment (ROI). Once you get that firmly in mind, you are ready to explore the differences between investors.

Remember, you are not selling your product or service to your investors...

(Using the same pitch you would use to sell to a customer.)

You are selling a share in a money-making machine.

To give you an idea about the things you need to consider, ask yourself the questions posed below. The answers help you narrow your investor selection and help define how you need to talk to them through your plan. See Appendix B: 65 Ways to

Finance Your Business, for more ideas on business funding.

What business are you in? Each type of investor has a certain portfolio they invest in. They have business expertise in funding certain types of companies in certain industries, and they tend to stick with them. For example, a retirement fund manager may limit his or her investments to low-risk companies. They are also probably well diversified having some foreign stocks, some utilities, some technologies, and so forth. You need to find out who funds your type of business.

How much money do you need?

Investors tend to have an average range of funds available for investments. For example, credit unions and banks tend to fund loans for items in the car, boat, and home price-ranges while government contracts can be in the millions. The smallest investors are probably yourself, your family, and your friends. The largest investors are usually venture capitalists and certain government agencies.

Try to match your need to a funding source that is capable of handling the amount you need. Consider also that you may need more than one source, working in concert,
which is perfectly acceptable in many cases.

How risky is your business?

The more risky your business, the more return on investment you need to offer to attract backers. You have to be able to offer them more return than they can get a less risky investment. For instance, if the bank is offering 9% CD rates, you have to either beat that or find a way
to lower your risk.

Be sure to match the amount of risk you offer with the right sort of vendor. For example, in banking, they mark up the money they pay depositors by about 2%. This is called the "spread." Your project has to not only pay back the entire amount but the interest too. In the back of the banker's mind, he or she is thinking, what happens if you can't pay it back? You have to make up any shortfall and losses from profit not sales. How much profit can you afford to lose?

For the investor, it would mean losing all the profit they would have made on their loan to you, as well as on the profit they would have made had they loaned that money to someone else who didn't default. This translates into
about a 98% assurance that they will get their money back.

In addition, be sure that the way your plan is written doesn't give
the wrong impression about your risk. Be honest, but be sure your perceived
risk
is accurate and not expressed poorly. For example, one measure of risk is
your Asset to Debt Ratio. Look at your plan objectively and ask yourself
if you
would offer funding based on your financial picture. You may need to pay
particular attention to the way you present financial analyses and ratios
to be sure your
business looks as sound as it really is.

For how long do you need the money? Each investor has a particular term in
mind. Many investors have more than one way to finance. For example, banks
offer different
terms for different purposes and amounts. Car loans range from 1-5 years: the longer the term the lower the rate. But the longer the term, the more money you end up paying. Home loans work similarly. On the other hand, venture capitalists typically don't want to be paid interest at all. They want to be cashed out in a fairly short time with a fairly high return.

Your plan should be designed around this need. Does your investor want his or her money back in a short or long term? Do they want it back in cash, in interest over time, or in stock? Can you convert the first loan into a second with a new investor, and cash out the first investor?

Do you plan to grow the business and then sell it?

This is a question you need to answer fairly early on in
your business planning. This is a fundamental goal,
and it affects the way you conduct daily business. If your goal is to grow a company and then cash out, your plan needs to address how you intend to
do that.

The way you structure your finances for this type of goal is different from the way you structure a company you intend to keep and run. If you plan to sell, how are you making your business more attractive to a buyer? What sort of
equity position do you have, and what sort of equity position will your investor have?
Will there be a market for your company when you intend to sell it? Do you have a business broker helping you? What sort of financial picture are you trying to paint?

Do you qualify for government grants, guaranteed loans, or special
Economic Development Zone funds?

Have you thoroughly explored the possibility
of grants,
subsidized,
or guaranteed loans? The government and private institutions have many
programs to aid certain sectors of the business community. Perhaps you are
only familiar
with disaster relief loans offered by the SBA, but there are many more.
You can find out about these types of programs through the government, trade
associations,
other business people, and through associations who specialize in locating
these types of loans and grants. One prerequisite for these special grants
and government
loans is a business plan.

Your plan will surely be rejected if you don’t
do your homework. However, some agencies will help you with your plan. Be
aware, though, that many,
many people apply for grants in particular because grants do not require
repayment
and are very attractive. Your plan has to be very compelling and competitive.
Be clever. Think about what all those other plans might contain, then highlight
why you are better and more deserving.

Are you asking for first-round or second-round
financing?

Some investors won't
offer first-round funding. Instead, they specialize in second-round funding.
Second-round financiers feel more comfortable funding companies who have
proven that they can meet first-round goals.

Find out which type of investors
fund companies at your stage of development. Your plan will be rejected out
of hand if you don't choose wisely.
Moreover, you don't want to go on record as having made this type of
mistake lest you have to come back and ask for an investment from this same
person
or agency
later on.

First round financing is usually a subject for venture capitalists,
government loans and grants, and angels. Second-round financing, which
typically goes
toward expansion and growth, is the specialty of other types of investors
such as banks,
finance companies, and business brokers.

Are you seeking all your funds from
one source or from a number of sources?

As mentioned above, some investors,
such as angels, tend to fund in groups
called
syndicates or consortiums. This is for two primary reasons. One is that they
want to spread the risk around. The other is that they cannot individually
meet the amount you are requesting. Find out what each investor's dollar
limits are.

This cuts two ways though. Some investors don’t want to
share the return and would not want to join such an arrangement. Similarly,
if you have previous
funding from somewhere else, try to find out in advance how your new and
current investors would feel about your bringing another investor on-board.
You have
to spell out very carefully the terms, risk, and standing.

For some investors, bringing others on board is expected. For instance, corporations
expect it and they sell stock for that reason. They care somewhat about how
much stock goes to any one shareholder but, in general, they welcome new
investors.
Similarly, general and limited partnerships are often set up to attract new
partners. Some real estate partnerships, for example, have a few general
partners who run
the business, but actively solicit limited partners who only invest funds
by buying shares of property.

If you intend to solicit additional investors,
your plan needs to be sent to the right sort of investor. It has to spell out
exactly how that arrangement
would work and how each partner or shareholder divides the equity and risk.

What
form of payback can you offer?

This may sound obvious. People pay back investors
out of profits, don’t they? Well, no. Actually, investments
are usually paid back out of sales. If you start tapping into your profit,
then you have
nothing to pay yourself or your employees with. You also eliminate your ability
to reinvest in your business without the need for further loans. See Part
Two: Business Plan Financials, for more information.

There are many ways to
formulate a payback strategy. Furthermore, each investor has a preferred
method of repayment. For example, a venture capitalist generally
wants to be cashed out. You have to show that you can earn enough to do
that. Will you be in a position to sell the company when the repayment is due?
Will you be in a position to make a public stock offering that will cover
the debt?
Or, can you take on partners who will cover the cash out?

For these reasons,
it is important to find out what sort of repayment plan (exit/payback strategy)
your investor expects. Then you need to figure out
if you can meet
that need one way or another. If not, find another type of investor or
change the way you do business.

What is your purpose for seeking funding?

Does your
investor want security or collateral? The reason you are asking for money
affects who you ask. If
you are
financing growth or expansion, you might look to stock offerings instead
of a bank or an angel. On the other hand, if you have assets in the form
of inventory
or accounts receivable, you may find

finance companies who will loan you money with that as security. As you
pay the loan back, you can borrow more up to a certain limit. If your purpose
is to purchase
property or buildings, you might want to seek out certain government loans
who prefer this type of security.

At the same time, consider leasing
or renting. If you need money to buy capital equipment or other fixed assets,
such as special machinery
for production, you may want to explore leasing it from the manufacturer
with a
buy-out option.

Your plan needs to highlight the purpose of the funds throughout. Use this
information to help you select the right investor.

Do you have any intellectual
property or other unique traits?

Investors are favorably impressed by companies
who have intellectual property such as patents
or proprietary
technology because that can be a significant business edge. Even if you don't
hold patents, you may have some other unique attribute that is in demand.
Perhaps you have developed an electric car battery that lasts for a week
without recharging
before anyone else. That might be interesting.

List these unique features
prominently in your plan. Remember that what is obvious to you may not
be obvious to your reader. Tell your reader why this
is an asset,
how it affects demand, and how long this advantage will be yours.

What form
do you want this investment to take?

1. Do you want to retain controlling ownership?


2. Do you want all the money up front?


3. Do you want a line of credit?
   A secured or unsecured loan?


4. Do you want to offer stock?

Be sure
that you match your investment requirements with an investor
who can handle it.

What
can your investor do to help besides investing?

As mentioned above, some
investors can offer management advice, product guidance, or business
contacts.
They are often a great source of contacts with other businesses or people
that you might benefit from knowing. Having a good relationship with
your investor
can also help if you ever get into temporary trouble and need some understanding.
Ask yourself:

• How typically rigid are they about the terms of the investment?


• Does
  your investor have shareholders or government regulators to satisfy?


• Does
  your investor make his or her own decisions or answer to a committee?


• When
  do you want the money?


• Do you need it all right now or a little bit at
  a time?


• Can you coast along as you are?


• Some investors move more slowly than others,
  and some investment instruments take longer to implement. For example,
  if you are self-investing,
  you may have to wait until your CD matures.


• Am I willing to invest
  in this myself? Some investors are impressed by your personal involvement
  or by a list of others who
  have invested in your
  business.
  Putting your own money where it counts can be very persuasive.
  
  
  

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