Think of the ROI Before You Have Intercourse
The ROI (return on investment) for someone who invests in your company or idea is not simply about the payout when they exit. That can be part of it, but every serious investor wants their money working for them , giving them a return and a big payout later. Every investment will have multiple streams of income that is collectively the ROI.
When my group invest in a business, among other things, the top five things we’re looking for are:
- What’s in it for me?
- Who is the Team?
- Where is the Traction?
- Who is the Target Market and what is the size of it?
- When and what is my exit strategy?
What’s in it for me?
All investors tune into the same radio station WII.FM; what’s in it for me. If they don’t the transaction is not an investment, it’s charity or philanthropy.
Some key questions to answer are:
When will the investor be able to repatriate their capital?
Most I know are looking for 12 – 18 months so that they can ride the wave with their equity position and send their money off to a new opportunity to start working for them.
How much of the equity do you propose they should receive?
Don’t worry, irrespective of what you propose they’ll tell you what they want anyway. This is often a reality check for investors as in are the principals real and serious or are they living in lala land?
What will my equity return over the duration until I exit?
Here is the bit that excites more people than I used to think it logical. Sometimes it’s because of the money back, and sometimes it is because of the market position that the company is achieving . One is liquidity for an investor, the other is a bankable asset, if you know which ‘banks’ you can use to leverage it.
What all of this should tell you is that investors are not waiting around for you to feed yourself and your employees with their money while you hopefully build something.
Who is the Team?
Putting a team together is crucial. Okay, that should be obvious, but often it’s not.
With the greater majority of business plans I’ve read over the last 30 years, the teams have been formed out of whoever could be attracted by the person with the original idea and the qualifications, skills, and supposed pre-eminence of the individual team members is blown up beyond proportion.
Keep it real.
Make sure there is a demonstrable alignment of vision, passion and purpose among the key people. That and a good mix of skills.
What value does each member bring to the business and why are they a smart investment for the investor? Ultimately the investor is backing the team to make everything happen. They need to be able to deliver and the investor needs to have sufficient comfort that they can.
Where is the Traction?
Traction can take many forms. It may be:
- Who are your current clients and how many do you have?
- What is your market share vs how long have you been in business?
- Who has/how many have pre-purchased/expressed interest in your product/service you are about to launch?
- What publicity have you generated?
- How big is your “real” social following and how engaged are they … really?
- Who have you attracted to your board/your advisory board or as investors
Who is the Target Market and what is the size of it?
A lot of people have written a whole bunch of stuff about target market. the bottom line is who are they, how many of them are there, what percentage of them is required to generate the revenue projections or more that you are suggesting you can achieve, and what percentage of the total population in the target area does this percentage represent.
If your plan is to open a brothel in a ‘town’ of which the only residents are a Catholic Priest, a Protestant Minister, a Buddhist Monk, a Rabbi, an Imam, an agnostic bloke and their respective wives and children, I reckon we can all imagine the target market based on the above criteria.
When and what is my exit strategy?
The next person who tells me that their exit is either to sell the company to some anonymous big company or to go IPO (initial public offering), I’ll slap the business plan around their head like a dead mullet.
It demonstrates no thought has gone into the exit; no understanding of the value they are building; no understanding of what that value can mean to different industries and specific companies. An exit is like a marriage; not in terms of divorce, but in terms of the dating that leads to the marriage.
There are actually 8 key things we and our investors look at when reaching a decision on whether to invest. The above however are the top five. When these are thought out in advance, and presented well enough to satisfy the investor the rest usually falls into place.
Latest posts by Paul J. Lange (see all)
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