Five things to do before approaching investors

Money is the lifeblood of any business, and at some point, every company is likely to need an infusion of cash to grow.

However, small businesses don’t usually have the luxury of large cash reserves to meet temporary or long-term funding requirements.

The upside is that there are a lot more avenues for financing these days. One of these is KCB Lions’ Den. The show is currently accepting applications from entrepreneurs who are looking for financing from investors, in exchange for a stake in their businesses.

Here are five things to do before reaching out to investors for money.

1. Define your product

Define your start-up, the sector you’re in and who could potentially be interested in it. Think about the possibilities that your product offers, and what industries it could be used in beyond the obvious.

This will ensure that when you approach an investor, you have a really strong sense of what you are offering, why it’s important and where its market fit.

2. Write a detailed business plan

Writing a business plan is easy. However, writing one with sufficient details for investors can be tricky. Entrepreneurs tend to leave out key numbers or be overly optimistic with those they provide.

For starters, know your burn rate – which measures how much money a not-yet-profitable business is spending each month – and break-even point.

Have an estimate of your first-year cash requirements, and your gross margin and how it compares to the average for your industry. Also, calculate a realistic growth rate and how your costs will scale up as sales do.

3. Clean up your credit

If your business doesn’t yet have its own credit history, many investors will want proof that you can responsibly manage money and pay your debts.

That proof is your personal financial track record. If you find any mistakes, contact the creditor involved, request a letter acknowledging the mistake and stating that it plans to inform credit-reporting agencies about it. Investors may be less concerned about your credit score than lenders, but they’ll be wary of entrepreneurs with major blemishes on their record, such as a bankruptcy or a loan default.

4. Line up your team

The big question for nearly every angel investor is: can you really do what you say you can?

They’ll want to know that you and your co-founders or management team can execute the ambitious business plan you’ve presented and pay back your loan or generate a return for the investment you secure.

Make sure you and your key people can talk about what’s ahead for the business, what the later phases of growth might be, what could go wrong in your sector, and how you’d handle these risks.

5. Have a viable exit strategy

Before they invest in your business, an angel investor will expect to see a strategy for their exit. The sale of shares to the company’s principals is a common exit strategy for angel investors who hold equity ownership positions, while the sale or merger of the company is an exit strategy for debt-holding investors. Your prospective angel investor will likely ask for a time frame, so have a realistic one in mind.

hustle@standardmedia.co.ke