Despite an uneven economic recovery, there is still money available to businesses from angel investors and venture capitalists. Before talking to any of these people, though, it is important to first fund your business with the three Fs: Founder, Family and Friends. As the founder, outside investors will first insist that you invest your own money toward making this venture a success.
Before even talking to an outside investor, all businesses need to have:
- A management team with a successful track record in start-ups or similar businesses.
- A "proven concept" that has shown revenue that can be scaled with additional funds. Investors favor providing expansion capital, not money to prove out something an entrepreneur thinks will work from a business plan.
Are you ready to talk to an outside investor? Take this test first and rate your business on a scale of 1 to 10.
1. The management team. How experienced are you in this industry? Have you grown a successful business before? How much passion and vision do you have? At the same time, how much flexibility do you have to change direction and heed others' advice? What are the holes in your management team and how will you fill them?
For example, rate your business a "1" if this is your first business venture on your own, have only done consulting work or you are still at your current job. Rate your business a "10" if this is the fourth business you have started, and you've sold two of them and went public with the other two.
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2. The market place. How big is the market for your product? How will you specifically address that particular segment of the market?
For example, rate your business a "1" if it's less than $500 million. Rate your business a "10" if it is over $100 billion. If you can reasonably capture 5 percent of the market, it has to be big.
3. Your product. Does your product solve a problem that people will pay money to fix? If you build your solution, who will buy it?
For example, rate your business a "1" if your solution would just be "nice to have." Rate your business a "10" if you know exactly how much potential customers already spend on solving this problem with fragmented or poorly-executed solutions that currently exist in the marketplace.
4. Prototype or proven concept. Is this just a theoretical business that only exists in a business plan or have you already built a product, Web traffic and paying customers?
For example, rate your business "1" if your business only exists on paper. Rate your business a "10" if you have a working product with customers that pay money to use it.
5. Strategic alliances. What companies have signed significant agreements to partner with your company, either technologically or as part of a marketing strategy?
For example, rate your business a "1" if the answer to this question is "no one." Rate your business a "10" if Microsoft, Yahoo, Google or eBay have given your company an "exclusive" relationship.
6. Sustainable competitive advantage. If someone came into your market after launch with more money than you, would your business revenue model survive? Do you have a technology, key alliances or community that is not easily duplicated?
For example, rate your business a "1" if your only response is that "you had the idea first.". Rate your business a "10" if you have obtained a patent for your secret technology and have wrapped up all of the key players in the industry in exclusive strategic relationships.
7. Cash flow. When will the company be cash flow positive? What do the future funding requirements look like? What is your gross margin? Do you have a repeatable revenue stream?
For example, rate your business a "1" if you need to attract $5 million from angels and you won't be cash flow positive until the Chicago Cubs win the World Series. Rate your business a "10" if you need less than $100,000 and you'll be cash flow positive within a year of launch.
8. Exit strategy. Forget the IPO; who will you sell your business to? Who are the likely candidates that can afford to buy your business at something like 10 times your current valuation? Every investor wants to know the shortest path to realizing a gain from their investment.
For your business, rate your plan a "1" if your response to the question is, "I don't care about the market; we are going to take this thing public six months after launch." Rate your business a "10" if you have already had bona fide offers to buy your company.
Remember that no business is perfect. There is a lot of risk and unknowns in every venture. The key is to know where your strengths are and to begin to build the areas where you are weak.
How did you score? Is your business investor-ready?