One of my favourite shows lately is Dragons’ Den on BBC sees entrepreneurs pitching their ideas to a group of savvy investors in order to obtain financial backing to get their innovation off the ground.
The show is well played out. The entrepreneurs proudly and confidently present their innovation and are met with the calculating and narrowed gazed of would-be investors. As the show’s name infers, it’s like going into the dragon’s den, petrifying, and you definitely sympathize with the entrepreneur.
But then the investors begin questioning things like cash flow, business assumptions, suppliers, marketing and target markets, and if the entrepreneur has any holes in their plans, they are soon revealed and pounced on by the Dragons. Finally the potential investors decide whether they will invest and the entrepreneurs leave either euphoric or shattered.
The reason the show works so well is that it is actually quite realistic. Entrepreneurs though passionate about their product, can become blind-sided about how to take their idea and make it successful and a viable reality. Often they don’t do enough research or their numbers don’t stack up which reduces the chance of their proposition being enticing to an investor.
Investors in today’s market are extremely selective about who they are willing to invest their funds with. In order to increase the chance of raising capital, entrepreneurs need to realise that they need a level of sophistication in the information presented in order for the investor to consider the innovation worth a second look.
As a start I recommend preparing a short Investment Plan document as an initial enticer for investors which outlines the opportunity and the potential return. If investors are excited by this and want to discuss backing your innovation they will expect the next level of sophisticated information, a detailed business plan and financial model.
To attract investors your business plan and financial model should cover:
- Business assumptions that are realistic and not overstated
- Assumptions that substantiate the investment return
- A clearly defined exit strategy for the investor
- A business plan that clearly articulates the business model and innovation and market positioning for this innovation.
Your ultimate goal in attracting capital is that you do not give too much of your business away while still making it attractive for the investor. At the end of the day, you’re the innovator and the brains behind the venture. Capital is one thing, but selling all of your innovation and not reaping the returns equally if not more than the investor is selling your innovation short.