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How investors evaluate your small business

When investors look at a business, they consider many factors before they choose to hand over their investment. In addition, they may be influenced by their own experience, perspective and ideas. They will also do research on what similar businesses in your field are valued at. Here are eight factors they will consider.

The problem

What is the problem that you want to tackle? Is it something that many people struggle with? Make sure that when you present the problem to your investor it is in a relatable way.

The solution

How do you intend to resolve it? How does your solution work and why is it better than the other solutions available? Make sure your solution is clearly explained. You will need to show how you will develop the service or product you wish to sell. In addition, you may want to give a demonstration of how your product or service works.

The market

Who are the people who will purchase your product or service? How big is the market? You need to explain what the market is. How you intend to enter and capture the market you need for your product.

The competition

Who are your competition and what future developments could be your competition? How do you plan to deal with your competition? How will you stay ahead of the pack? The investor is interested in this because they want to make sure you know your product or service well.

The team

Who makes up the team? What skills do they have to add to the business? If there are skills missing, how will you make sure you acquire them and improve the skills of your business. Who is the CEO? The investor will want to have a good rapport with the CEO if they plan to invest their money into your business.

The business

What is your plan? What is your financial forecast for your business? Here you need to heed on the side of caution. Do not overvalue your business because then the investor may not be interested in investing with your company. Furthermore, they will want to know how you will create recurring revenue.

Your brand

How strong is your brand in the market? Do you have a good brand idea compared to what is already available? Branding can add great value to your company.

Exit value

Another factor which investors are interested in is how much will they get back should you decide to sell your company, or they decide to sell their share in your company. They want to know who might buy your company and how much they may be willing to pay in two to five years’ time.

After they have made these evaluations, they may also make a small calculation before they offer an amount they are willing to invest. Two phrases which are important to know are the “pre-money valuation” and the “post-money valuation”. The “pre-money valuation” is how much your company is worth before the investment and the “post-money valuation” is how much your company is worth after the investment. The investor may use the following formula to work out how much they will own when they invest into your company:

Equity percentage owned by investor = Amount invested ÷ (Agreed pre-money valuation + Amount invested)

 For example: if an investor invested 2 million and your business is valued at 5 million then the equation will look as follows:

Equity owned by investor = 2 MIL ÷ (5MIL + 2MiL) = 29%

This means that should the investor give you 2 million then they will own 29% of your company.

With this percentage and the consideration of the factors above the investor will evaluate if your business is a good investment or not.

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