Think of the ROI Before Having 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 are 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 Niche, and what’s their size?
  • 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's the traction?

Traction can take many forms. It may be:

Who is the Target Market and Niche, and what’s their size?

A lot of people have written a whole bunch of stuff about the target market and niche. The bottom line for investors 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?’.

Now obviously you have to do more than than to know who you are marketing to and I have a course designed to help you do that. Hit me up for details if interested. For now though the following will set you on the right path.

When considering target market and niche, both concepts utilise demographics and psychographics, but the emphasis and application differ between the two.

A target market refers to a broader group of potential customers defined by shared characteristics, including demographics (age, gender, income, education, etc.) and psychographics (lifestyle, values, attitudes, interests, etc.). Use these criteria to segment the market and identify the specific audience you aim to reach with your products or services. 

The use of demographics and psychographics in defining a target market is crucial for understanding who the potential customers are and what motivates them, enabling you to tailor your marketing strategies effectively.

A niche, on the other hand, is a more specialised segment of the target market characterised by a unique demand or interest. While niches can also be defined using demographics, they are often more deeply characterised by psychographics. This is because niches focus on specific attitudes, interests, or values that are not as widespread across the general population. So with Niche you are going to do a deeper dive into the lifestyle, values, attitudes, interests, intrinsic drivers, extrinsic motivators, etc. of your target market. If you are going to drill down to a niche level of your market, be sure that the products and/or services you offer are specialised to meet the unique needs or desires of that specific group.

In terms of pitching for investment, use Pareto’s Principle to determine where the majority of the income is going to come from - general target market or a niche - and whilst mentioning both, favour the area with the larger income capacity over the other. 

If your plan is to open an ultra-premium, single-malt whisky bar in a town where the only residents are a renowned whisky critic, a sober bartender specialising in mocktails, a teetotaler health blogger, a wine enthusiast with a penchant for vintage reds, a college student who's only ever drunk cheap beer, a water sommelier, and their respective circles of friends who share similar tastes and preferences, I reckon we can all imagine the target market based on the above criteria. 

Nonetheless, make it clear to the investor.

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 roll up a dead mullet in their business plan and slap it around their head.

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.