These are some of the common questions that are asked by any investor.
It is quite common for entrepreneurs to include overly optimistic market potential figures in their business plans, stating that they require only a tiny fraction (such as one percent) of the market to attain their revenue targets. Such figures are often questionable. If a company is only capturing a small fraction of the market, what sets it apart? What is its real value proposition and competitive position? INVESTORs usually prefer companies that strive to be the industry leader in a particular segment. Ultimately, market potential projections should be bolstered by independent research and supported by bottom-up or top-down calculations.
This question may have two incorrect responses, as a business can be either too ordinary or too extraordinary for a specific investor. If it is too ordinary, the investor may be worried about competition and the business’s longevity. If it is too exceptional, the investor may be worried about the time required to attain critical mass. Many truly innovative products necessitate market education, which can be a lengthy and unpredictable process.
Investors seek businesses with products or services that cater to an evident market need or demand. Does your product fulfill a requirement for the customer? Or is it just a luxury item? If it falls under the latter category, it is essential to exhibit how your product will gain acceptance based on market trends, that is, how people will start demanding it.
Investors are interested in understanding how you derived your revenue estimates from the market potential figures, which ideally should have been obtained from external sources. They are looking for evidence of a significant growth opportunity that can scale rapidly, enabling them to reap returns on their investment as soon as possible. It’s important to be ready to explain the methodology you used to estimate revenue based on the market potential in detail.
It is widely acknowledged in the private equity industry that the most crucial aspect of investing is management. Investors seek management teams that possess three critical traits: a track record of building successful businesses, industry-specific experience, and strong personal qualities. The latter includes traits such as energy, resourcefulness, integrity, perseverance, risk-taking ability, and intelligence. Additionally, investors value humility in managers. In some cases, it may be necessary for the founders to take a backseat and allow someone with more experience to lead the company.
When asked about your competitors, it’s important not to dismiss the question by saying “none.” While investors are certainly interested in how your business will differentiate itself from competitors, they’re also assessing your level of experience and knowledge as a business owner. It’s unlikely that your business has no competition at all, as buyers may have alternatives or choose not to use your product or service. It’s important to consider all potential competitors, even those that you may not have thought of, to demonstrate your thorough understanding of the market.
When presenting to investors, it’s crucial to demonstrate your strategy for staying ahead of the competition, not only in the present but also in the future. This means considering potential new market players and showing how you plan to defend against them. A simple “first-mover advantage” won’t suffice. Instead, it’s important to highlight your company’s distinct features, such as proprietary technology or a superior approach to reaching your target audience. Ultimately, investors want to see what sets your company apart and gives it an advantage in the marketplace.
“What do you own?” and “What can you protect?” are two essential questions to consider. Depending on the industry, patents can be crucial in safeguarding a company’s investments in research and development, as well as securing a profitable market position ahead of competitors. Trademarks and copyrights are vital for protecting a company’s intellectual property and brand. Additionally, investors will want assurance that the company has taken the necessary measures, such as non-disclosure agreements, non-competes, and employment agreements, to protect its intellectual capital.
Do you recall the time when you achieved financial independence from your parents, and your earnings surpassed your expenditures, releasing you from their financial support? Ideally, this resulted in less concern on their part about your financial well-being. This idea is analogous to achieving financial independence as an entrepreneur, which also lessens the risk for investors. However, the ultimate objective is to swiftly reach an exit strategy. Profitable businesses tend to be more appealing to potential purchasers and the stock market.
A comprehensive business plan encompasses marketing tactics that showcase an awareness of market trends and consumer actions. Investors seek more than just a rundown of your marketing plans, and they may pose queries such as: What are your firm’s costs for acquiring customers? Have you determined the average and desired revenue per customer? Are you aware of the number of customers required to reach a break-even point? Do you understand the sales cycle for your product?
The most prosperous companies tend to have a strategy in place to retain customers, which may begin even before the customers are acquired. It has been stated that acquiring new customers costs five times more than generating business from existing customers. Therefore, customer retention is paramount for the sustained triumph of most businesses.
Have you conducted research to evaluate what is truly significant to your customers? Do you have an understanding of the critical product features as opposed to the peripheral ones? Once you’ve obtained customers, it is crucial to implement procedures to maintain their satisfaction and stay informed of their evolving requirements. Have you contemplated the approach you will take to support the product and cover the costs associated with that support? Will existing customers repurchase your product or service? Will they suggest it to others? Consistent customer feedback is vital in order to obtain the answers to these types of questions.
Is your business model focused on consumers or will you offer your product or service to other enterprises? What is your understanding of the demand for your product or service within your intended market? Are you aware of the purchasing behavior of your target audience? Are there any obstacles that you anticipate encountering? For instance, will you need to educate the buyer? Additionally, consider how you can utilize partners or resellers to reach your target markets. Familiarizing yourself with the answers to these questions will be crucial when discussing your potential with an investor.
It is crucial to keep in mind that alliances can have both advantages and disadvantages. Potential investors will inquire whether any of your alliance agreements have impacted your intellectual property rights and whether your business has any outstanding obligations to third parties. On a positive note, you should showcase how alliances have aided your company in securing particular distribution or sales channels for your products and services. Do any of your alliances confer you with a competitive edge? Do they establish barriers to entry? Do they assist you in reaching customers more effectively?
All products eventually reach a saturation point where they become obsolete due to evolving customer preferences and competitors’ product offerings. Have you forecasted the time frame when your product’s profitability will decline, both for initial sales and follow-on purchases from existing customers (such as upgrades)? What is your strategy for research and development investments, and how will you ensure revenue generation when your current products reach their saturation point?
Although the recruitment landscape may evolve over time, attracting the right talent remains a constant challenge. Investors are not only interested in your current team structure, but also in your plans for filling critical positions in the present and future. Have you engaged with an executive search firm or are there any potential candidates in your pipeline? Additionally, how do you plan to compensate and incentivize employees to ensure their retention while managing labor costs?
An investor’s goal is to make a profitable exit from their investment, usually through acquisition or IPO. However, these options have seen less activity lately. As an entrepreneur, it is important to have an exit strategy that can provide a return on investment of at least 50 percent. You should consider potential acquirers and be realistic about the timing and valuation of any potential mergers or acquisitions. Be creative and think outside the box when it comes to M&A opportunities.
Investors are interested in ensuring that the funds they invest are utilized effectively to expedite business opportunities, resulting in a timely return on investment. It is not advisable to use investments to fulfill current debt obligations. Therefore, it is crucial to present a schedule of important events, detailing how the funds will be spent and what they will enable the company to achieve.