Steps to Growth Capital Self-Study GuideStep 3

3.2 What Investors Want

The experience of the venture capital industry is very clear. Investors are looking for three things: excellent profit potential, a high rate of return and a way to get their money out. If these conditions don't show up in your investment proposal, your pitches and your presentations, potential investors will walk away.

Think of yourself as someone offering an investment opportunity. To make your investment seem attractive, you'll need to provide information that is solid and convincing for each of the investor's key conditions. This information can also serve as the foundation of your business plan and investment proposal.

What investors look for

1) Investors are looking for excellent profit potential.

You must demonstrate that you:

• understand your industry and your market;
• run a company that's ready to grow; and
• have a viable plan for growth.

Conduct an analysis of your company's strengths, weaknesses, opportunities and threats. Take this analysis as the foundation of your plan for growth and profit.

2) They want an exceptional return on investment (usually 25% to 40%).

You have to show them:

• the value of your business, now and in the future; and
• the rates of return they can expect.

Determine how much your business and your growth opportunity are worth. This valuation will help set the price you want investors to pay; how much equity they will get; and ultimately what return on investment they can expect.

3) Investors need a way to get their money out.

You have to provide:

• a workable exit strategy.

Consider the different options for exit strategies and develop a clear plan with fixed time lines for investors to recoup their investment and draw profit.

Plan for Growth: Prove Profit Potential

Tip

Investors want:

• Confidence in Management

Investors will expect to see information that supports your plan. They will look for quantitative and qualitative information on your industry and your company. You have to have that information ready. So, you should conduct an analysis of your business environment and your company. One way of doing that is to use a situation analysis to assess your current situation and opportunities. This is discussed in the next section of this Step.

Valuation: The Basis for Return on Investment

Risk capital investors want to help you launch your idea or expand your operations. But, in exchange, they expect a high financial payback (or return) on their investment. Investors want evidence that your investment opportunity will generate a return that will compensate for their risk. You'll have to prove to them that your company can generate an exceptional return: usually 25% to 40% compounded and adjusted for inflation.

To predict return on investment, you've got to start with a valuation of your business. The valuation will be the basis for a number of key parts of the deal you offer investors:

• how much investors will pay to invest in your company;
  
• how large a share of the company they will get in exchange; and
  
• how much they are expected to make from the investment.

Valuation methods are covered in detail later in this Step.

Exit Strategies

Investors usually want to cash in their shares somewhere between three and seven years after making their investment. It's up to you to assure them that you've thought about how to comply with their wishes. Put another way, you've got to have an "exit strategy" for them. Will the company go public? Will it be sold? How? Will current business owners buy out the investors? The exit strategy is often the only way that risk capital investors can secure a 25% to 40% return on their investment.

Exit strategies include initial public offerings, sale of all of the shares of the company, sale of the investor's shares to a third party, buyback of the investor's shares by the company, and debt repayment. Later in this Step, we cover how to determine exit values for different exit strategies. (For more on exit strategies themselves, see " What's On the Table" in Step 8: Negotiate the Deal.)

Confidence in Management

Most risk capital investors claim that management is the single most important aspect of a business opportunity. Your industry analysis and your plan for growth are key elements in conveying the capabilities of your management team. If these elements are convincing to investors, they will begin to have confidence in the management. ( Step 4: Demonstrate Your Management Capabilities covers this topic in greater depth.)

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