Small businesses need capital to grow. Yet, many times their ability to attract and raise capital is dependent on their investment readiness.
Being investment ready is about providing the evidence for the story you tell about your business, and whether you have thought seriously about your investor’s needs – their return on investment.
Sello Martin Matshego, investment readiness portfolio manager at Fetola, a company that develops solutions to help SMEs grow, works hard to bridge the gap between entrepreneurs and investors.
“We help entrepreneurs understand that investment readiness is not a destination but a journey. We prepare them by making them aware of their bankability, helping them understand the specific needs of financiers, and improving their credibility so that they are able to present their business in a way that leads to a positive outcome,” says Matshego.
Here are Matshego’s five tips to turn your application into an attractive investment offer that will appeal to investors and financiers.
1. Give yourself time
Do your homework months before you approach financiers for funding. This is not a process that can be completed overnight. You will need to provide adequate proof of historical and projected financial performance. Use this time to gain a deeper understanding of the various funding options and requirements, as well as improve your financial literacy and skills.
2. Identify why you need funding
If you need money to cover the daily operations of running the business, you are already in trouble. Financing should ideally be secured to drive growth, i.e., against a large purchase order, for product development or increasing production capacity.
3. Understand the investor
Every investor’s responsibility is to maximise return and minimise risk. Decide the type of investor you are looking for as this will dictate the approach you take. It will also give you an idea of the criteria they use to assess a business and the information you need to include in your pitch.
4. De-risk your business
Investors usually see SMEs as risky because by their very nature small businesses are young and informal, have less publicly available information and do not have enough assets that can be used as collateral. You can improve the valuation of your business (and its attractiveness to investors) by addressing these key concerns.
Your chances of success improve considerably if you are legally compliant, have a good product-to-market fit, have conducted market and competitor analysis, and developed a clear marketing plan. It is the effective packaging of all this information to your investor that reduces your risk.
5. Investors invest in people
What you might not realise is that investors also scrutinise you and your character when you pitch your business. Are you able to set realistic goals, milestones, and metrics to support your funding requests?
Investors are attracted to entrepreneurs with a positive attitude, and those who can adapt to new information and challenge their own ideas. You will also be judged on your level of integrity and commitment, willingness to accept feedback, and your focus on the future.
Mohamed Majapa is the owner of Bora Growth Partners, an SMME growth consultant business that helps small business owners understand and address growth challenges. His advice to entrepreneurs preparing to pitch to investors: “Know your business numbers: investors tend to prefer investing in business owners who understand the vision as well as the details on how to fulfil it.
“This often boils down to having a keen understanding of your business numbers – this is more than just revenues or profits or losses, but what drives these revenues, profits or losses. This speaks to your operations, your day-to-day activities, your customers and how you acquire them, serve them and retain them; your team and their operational contribution in driving business performance, your distribution and how your offering gets to the market etc.
“Your business operation is your soul, your engine. The outer body can look as good as it can be but if your inner soul or engine is broken, you will hardly move. A business owner who understands these intricacies often tends to instill investor confidence in the funding process,” concludes Matshego.