Platt Perspective on Business and Technology

Thinking like an investor as you plan and build your business – 1

Posted in startups by Timothy Platt on November 11, 2012

I have at least touched on the issues and questions that comprise the investor perspective a number of times while writing this blog. And in that regard, and for this posting just considering postings developed for my Startups and Early Stage Businesses directory, I cite by way of example:

Startups and a Word that Divides Them – investment and
Online Store, Online Market Space – part 18: exit strategies and long term planning.

Investors, whether angel investors or venture capitalists look for business opportunities that look promising as sources of profit and monetary success. They look for opportunity to both recoup their investments and to make a profit, and a sufficiently large one so as to offset any losses from other investments made that do not work out and to offset and compensate for risk taken. So thinking like an investor is all about thinking in terms of making the business succeed, and reach cash flow positive, and make a profit.

My goal in this posting is to more explicitly and systematically discuss some of the issues that savvy angel investors and venture capitalists consider when making their investment decisions, and some of the positives and red flag warning signs they look for while doing that. And I begin that with what I see as the most fundamental requirement of all: ability and willingness to effectively communicate.

A prospective investor needs to be able to ask some relatively simple and straightforward questions and receive clear and understandable answers in response. And that definitely includes a clear and jargon-free explanation as to what a startup or early stage business seeks to offer as its defining unique value proposition that it would bring to market (see Creating a Unique Value Proposition – looking past the cliché and the hype.) And that includes the business founders and owners offering enough insight into their thinking as to how they would accomplish this, to give potential investors a sense as to whether these people have the skills and experience, and the temperament needed to actually follow through and build a business.

Confidentiality agreements to protect any proprietary or confidential information that would be shared in this process should never be a problem and off-the-shelf, standard forms are available online for this and related due diligence tasks, and for protecting both business founders and owners, and potential investors.

But I stress here that this communications requirement does not mean that a startup or early stage business founder seeking investors has to have all the answers. It means that they have a good idea as to what the right questions are (see Startups and Creating a Unique Value Proposition with a Focus on Addressing Chokepoints) and that they listen and hear effectively as well as speak clearly and effectively.

So what do savvy investors look for and look out for when meeting with business founders seeking funding? The answer to that is not just “another glossy, high production value PowerPoint presentation.” Most any active investor who works with and funds startups and early stage businesses has opportunity to all but drown in them. What more specifically do they look for in the ventures that they would back, that would help them separate out the gold from the hype, and even the articulately and engagingly presented hype?

• Investors look for the right people to invest in. Serial entrepreneurs who have been successful at least once in other startups and early stage businesses obviously rate very highly for consideration as investors make their investment allocation decisions. But entrepreneurs who have tried and failed in an earlier venture, but who have clearly learned a lot from that experience also rate highly as sources of potential investments too. Entrepreneurs who have really thought things through and who understand the basic issues from actual business experience are always appreciated.
• TIP: As an entrepreneur, do your homework on any potential investor who you might approach. Look them up individually, the people you would meet with, on sites such as Linkedin and Google them. And if they operate from an investment group or business, Google their organizations too. Most professional investors focus on specific industries or functional areas for which they have expertise. So know who you are facing across the table, exactly the same way they research you to know who they are facing. And find out what investments they have made – what types of business they have helped fund and as much as you can about the experience and success of those ventures as other entrepreneurs have worked with these investors. Here, knowing what potential investors require in terms of decision making control is at least as important as knowing what they seek as a monetary return on their investments and under what terms.

Once an angel or venture capital investor is comfortable that they would be working with people who offer real potential from their experience and approach, and who can communicate and listen as well as speak, their questions turn to focus on precisely what these entrepreneurs seek to do now.

I am going to pick up on this discussion at that point in my next series installment. Meanwhile, you can find this and related postings at Startups and Early Stage Businesses.

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