7 Essentials that unlock Start-up equity investment

Different people like different things. Take cakes for example. Would you choose chocolate or fruit cake? It’s worth remembering this when it comes to raising start-up equity investment. Different investors like different opportunities for different reasons.

For some investors it’s all about sector – what’s hot, disruptive or growing fast? For others it’s about the stage of development. Some investors like to get in early, others like to wait till the business is scaling. For many investors the management team behind the business really matters. The point is, you can’t predict the individual preferences and foibles of investors.

Communicate what is on offer

You can’t predict, but you can communicate clearly what is on offer. The quicker an investor understands what is on offer, the quicker they can decide if they will back you, or not. Raising investment is time consuming. It’s a distraction from your real job of growing your business. You don’t want to waste time talking to people who are not interested in what you have to offer – so make sure you are clear and succinct in your communication. Give people the information they need to make the right choice for them.

The ingredients of success

Most cakes have four essential ingredients (flour, butter, sugar and eggs). Similarly, most investors taste test the appeal of a start-up equity investment against four ingredients:

Opportunity – what is the problem the business solves for its customers? How big is the market? Are there many competitors in the sector?
Traction – investors don’t back hunches or ideas. They want evidence that demonstrates how effectively the business develops products and recruits and monetises customers. They want to know how established the product range and marketing strategy are?
Team – who is behind the business? What motivates them? Do they have the skills, experience and relationships to deliver a successful business?
Deal – how much investment does the business need and what equity is offered in exchange for that investment? Is that realistic and fair?

7 Essential Ingredients

When you dig into the detail of what investors look for in order to make a start-up equity investment, there are 7 Essential ingredients investors look for to unlock start-up equity investment:

1. The problem your business solves for customers

Customers don’t buy products. They buy solutions to problems they face. What problem does your business solve for its customers? How does it do this better than anyone else?

2. The market size and targeting approach

This is usually addressed in terms of the Total Addressable Market (TAM), the Serviceable Available Market (SAM) and the Serviceable Obtainable Market (SOM).

The Total Addressable Market is the number of people who could buy your product. This show investors the ultimate size of the market and is usually demonstrated with industry sector research reports.

The Serviceable Available Market draws a picture of the customer segments your business can reach given your geographic/financial/product constraints.

The Serviceable Obtainable Market – or your target market – identifies the customer segments you intend to target first. Given all businesses have limits to their marketing budget you have to focus somewhere, even if you will extend to other segments at a later date. Different customer segments have different needs and most start-ups choose to focus their attention on customers who have the strongest need and ability to pay.

3. Monetising the market and growing revenue over time

How does your start-up make money? Investors expect to see clear revenue streams. Ideally more than one as this de-risks the opportunity. A detailed 3 year (or sometime 5 year) forecast should tell the story of your start-up’s growth trajectory in numbers.

4. Traction

Traction provides evidence – or proof, if you will – of what the business has achieved so far. Traction is an equation . It isn’t something that happens over night. It is an iterative process which showcases not just your start-up’s ability to deliver, but that you have the grit and determination to perform over the long term. Running a start-up is a marathon not a sprint!

5. Brilliant team

However good your business strategy and executional plan, it is people who make things happen. Does the team behind your start-up have the skills, experience and relationships to deliver the strategic drivers that will make your start-up thrive?

6. Ask

Cash is king, right? Investors need to understand how much money your business needs to succeed. They are not interested only in what X or Y costs, but that you have also thought about how much time it will take you to achieve key milestones in your start-ups development. There is nothing worse than the cash running out before you have reached a critical milestone that unlocks the next stage of start-up equity investment.

7. Valuation and term sheet

If all the elements of your start-up strategy are in place, then investors will assess the deal. What are you offering in exchange for investment? Does that taste good or not? Most founders focus on valuation (the percentage of equity (shares) they are offering in exchange for a cash investment), but the detail in the term sheet is important too. What type of shares are on offer? When do they vest? Who will sit on the board to represent shareholders? It all influences the appeal of the deal.

Investors are busy – the 7 Essentials help you communicate quickly & succinctly

It’s important to recognise investors are busy people. They are short on time and have lots to distract them from looking at your opportunity. The 7 Essentials give investors the information they need but you must also be succinct in conveying this. Go on for too long and a potential investor will drift away. No one like stale cake!

Everything you prepare needs to be short, to the point and focused on giving investors the information they need. Nothing more and nothing less! It’s a good exercise to convey the 7 Essentials on just one page of A4. One page can usually be read in 5 minutes which is how long most investors take to make up their mind whether this is the cake for them, or not!

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