When it comes investors, it is likely that they are interested in many aspects of your company and will ask several questions related to it. However, the questions that they ask do not always reflect what they are actually thinking. Hence, it is advantageous to seek to better understand what investors are really thinking. Based upon our experience work collaborating with dozens of investment groups, we have discussed companies before and after they have been funded. This article provides information related to six things that investors are probable thinking about your company when you present to them, particularly at a stage when they take you more seriously. By understanding these questions, your company can form a better investment case that is more likely to have interest by investors and effectively maneuver the fundraising rounds.
1 – When will we get our money back?
This question in finance terms is considered the payback period and is the time in which lapses between the point an investment is made and the point the investment amount is recovered. The payback period is helpful because investors want to know the worst case scenario of how much time will lapse and what will need to be performed in order to avoid a financial loss. This is helpful for companies to present through the financial projections to demonstrate the period in which the investment is made and the point at which it is recovered.
2- What are the risks in this business model?
When it comes to the risks associated with any investment, investors consider all of the options as it relates to your business, the industry, and the management team. Investors look for more reasons not to invest into a company than for reasons to invest in one. The key risks will be exposed regardless of how much you may attempt to conceal them, so it is helpful to come up with ways to mitigate your threats in order to avoid them becoming inhibitors to the acquisition of financing.
3 – How will I exit this company?
When it comes to making an exit, investors will want to understand what the next steps are and how they will leave the company when the time is appropriate through either an initial public offering or acquisition. In general, a company that remains privately held is considered unsuccessful because the returns that investors seek are only generally realizable if a company is acquired for a high valuation or becomes publicly available at a single point in time. The exit strategy is an important part of the business and is what investors will be thinking about before they even enter.
4 – Who else would be interested in this?
When it comes to financing an investment, some investors perform a co-investment situation in which they commit capital in conjunction with other investors. If the business model is highly esoteric and not applicable to other cases, it is not likely that other firms will have interest and will not invest alongside the company. Therefore, it is often better to have a co-investment arrangement already aligned with the business and enables them to immediately fund the business.
5 – What financing structure should we go with?
When it comes to selecting an appropriate financing structure, there are many ways channels that the business may take. For instance, a debt investment could be made that is either direct or convertible, as well as a straight equity investment. The most appropriate financing structure that the company selects is unique to its business model and approach in the market. If the equity investment is straight with no debt, then the valuation will play a larger role into the amount of capital awarded to investors in exchange for the investment.
6 – How will this impact our portfolio?
When it comes to investing into a company, there are factors aside from the straight debt/equity financing structure. For instance, the portfolio is shaped by a combination of factors including the synergies it has with existing companies or the potential conflicts of interest. A company that operates in the lead generation space may benefit a company that is in need of more leads, and two lead generation companies may lead to cannibalization. Therefore, it is also a smart idea to target investors that have a synergistic portfolio aligned with your business model, as they will be the ones that have the most interest.