How to look at your business like an investor
Whether you’re a business leader on the cusp of seeking external investment to fuel business growth or not – learning to look at your organisation through the eyes of an investor can help you make better decisions that enhance the value of your company.
How do we know? Because when we work with clients looking to raise growth capital, often the process of examining the inner workings of their own business throws up eye-opening and valuable insights – so much so that it’s a really valuable process even if the planned fundraise doesn’t go ahead.
But why wait until then to access this insight? It’s a shame to only truly understand how certain aspects of your business impact its overall value when deep into a financial event, because once up against the clock you’ve no time to implement the changes required to fix the problem. Consequently, you either have to settle for a lower valuation, or worse, your deal falls over.
So how can you think like an investor when assessing your business to get ahead of the game and protect and maximise the value of your company when fundraising? In assessing their appetite for investing in your business, these are the sorts of questions investors will be asking…
Does your business have a defensible and unique competitive edge?
Investors will be looking for evidence of a strong, sustainable competitive advantage in order to tempt them to part with their money. They will assess your market positioning in the competitive landscape and listen eagerly to your origin story – what’s the problem you are solving and why that matters to your customers. Can you clearly articulate and demonstrate this?
How is the industry performing as a whole, and where is it going? What potential is there to grow in this space?
Investors will research the industry your business is operating in – analysing its past performance and where it’s going. They will consider your business place within the industry and make a judgment to what the potential headroom is for your business to grow.
How credible and competent are your management team?
People invest in people, so an investor looking at your business will definitely want to access the quality and credibility of the management team in place. the growth you’ve forecasted. Are your team able to deliver the forecasted growth and what evidence is there of hunger to scale?
Is the cash flow in this business sustainable?
Naturally, financial metrics are crucial in an investor’s assessment of your business. What’s the recent revenue and has any of it made the long journey down to the profit line? What’s the burn rate and how does the financial forecasts show their capital being employed over the next 18 months? Particular hang-ups can come from a business model impacted by seasonality and any company with this characteristic seeking investment will have to demonstrate the ability to weather the storm through the lean months. Analysts will stress test your organisation by tinkering with the variables in your financial model to assess sustainability and risk, so why not get ahead by producing a low, mid and high model.
How quickly is this business growing?
What growth has the business demonstrated to date? Most investors will be looking to past performance as an indicator of future revenues.
How will any investment I put into this business be used?
Investors want to see a clear plan for how you will employ the capital they supply if and when they invest. Many funds will expect a structured 100 day plan from investment to get that capital working.
Is the business overly dependent on one source of revenue, and if so what level of risk does this expose the company to?
A key indicator as to the stability of your business lies in the makeup of your revenue. If it’s all from the same source, say one, or a small handful, of big clients, they will be very nervous as the loss of just one of these will have significant impact on your business’s performance. What they like to see is good diversity, with eggs in many baskets rather than in one so that you’re protected from unforeseen circumstances.
Of course, in their analysis of the opportunity, investors are simply pitching risk against reward to ascertain their level of interest. So it’s vital you know the answers to all of these questions confidently and competently. But even when you’re not looking for external investment, thinking like an investor and having these areas of your business “ship shape and Bristol fashion” will help you to boost growth and create value in your business.