What Equity Investors Look For?
Entrepreneurs increase their probability of raising equity funds at a fair valuation when the entrepreneur understands the criteria investors use to evaluate an opportunity. Equity investors are most interested in management’s industry and entrepreneurial experience, management’s ability to execute, market size and growth, scalability, competitive differentiation and pricing power.
In your business plan and in presenting to an investor emphasize management’s domain knowledge of the industry. If you plan to open a home health care service, have you worked in the health care industry? Have you studied health care management? Have you or other members of management every successfully started a business or worked for a small enterprise?
Investors want some assurance/proof that you can implement the business plan. Present some examples of your ability to translate a plan into action and positive results.
Because equity investors take risks investing, they want 5 or 10 times their money back depending on the years until the expected exit and the perceived business risks. It is much easier to get 5 or 10 times their money back in a rapidly growing market than in a static one. Present some market research on the size and growth of your target markets.
Next equity investors want proof that your enterprise has or can take advantage of this growing market and that the market size is large enough to justify the required investment. How do you plan to scale this market?
To scale the market, your business needs competitive advantages which can be quantified. For each of your products/services and each of your markets are you better worse of the same as competition in terms of features, benefits and image. Can you quantify that competitive advantages in dollars, yuan or other local currencies?
Investors want to know if your enterprise has pricing power. If a growing market and quantifiable competitive advantages allows your enterprise to increase unit sales each year but only if you reduce the price, this will negatively impact the investors return.
To learn more about how to raise funds for your business, consider taking my next course in October, entitled “ Funding Your Entrepreneurial Venture”, where you’ll get more insights and have an opportunity to meet and collaborate with peers.
Sign up here, and I’m looking forward to having you in my class.