Lender and Investor Perspectives

In order for a company to grow, at some point they’re going to need more money to make this growth occur. This money can come from a variety of places including personal savings, friends and family, existing company cash flow, or lenders or investors. It is very common for a company to reach out to a lender or investor in order to obtain the necessary money in order to grow. Unfortunately the business can’t just pick the lender or investor they desire and have them automatically give the needed money. There is certain criterion that investors and lenders look for before investing money into a business.

Any type of investment plays a major role in the company being able to take their business to the next level. According to an article in the Harvard Business Review titled “How Venture Capital Works”, it states that venture capitalism plays a big part in the after innovation stage of the company, the stage in a company’s life when they start to commercialize on its innovation. It is estimated that 80% of venture money goes into building the infrastructure required to grow the business. The money goes towards expenses like manufacturing, marketing, and sales. The money will often go towards balance sheet items like fixed assets and working capital. With the money going towards fixed assets and infrastructure, the goal is that the business will grow to a sufficient size in order to be bought by a larger corporation, or be able to go public and liquidate their investment in the IPO.

In order for any business to be able to obtain funding, the investor is going to be looking into many different facets of the business in order to determine if they’re going to be able to make a significant return on investment. According the article “The Four Main Things Investors Look For In A Startup” by Mark Suster, it states that there are four key factors that investors look for, and they’re easy to remember because they all begin with M. The four factors are Management, Market, Money, and most importantly Momentum.

The management team should be one of the first things a potential investor is made aware of. Mark Suster, an entrepreneur turned venture capitalist, says that he bases 70% of his decision to invest based on the management team and 30% based on the product. If you have a really good management team in place and that is introduced in the very beginning of the pitch, there’s no way the investor will not be intrigued.

No matter the size of the investment, or the investment company itself, they all want to believe that the business they’re investing in has potential to be huge one day. Venture capitalists care about investing in big markets, with ambitious teams. With this being said you should never talk about early exits, quick flips, previous acquisition interests, and so on when meeting with investors.

Most investors are going to want to have enough equity in the company in order to see a big return on investment for their money and efforts going into the company. The amount of money being sought after, and the amount of equity the business owner is willing to give up all plays a major role in the investors mind. It is important to have an understanding of the minimum amount of equity the investor is looking to acquire.

Momentum is what investors look for the most because it shows a proven tract record of success or potential success. Having certain metrics that indicate the business will be successful like sales, users, subscriptions and so on. It is important to show that it will be valuable to invest in the infrastructure of a business and help in the commercialization of whatever business innovation you have come up with.

Knowing what a lender and investor are looking for in a company is very important. Understanding these aspects will assist in obtaining funding that much more. With the different perspectives provided of what is being sought after by the investor, make sure you’re able to provide the many things desired. It is very important to know the industry inside and out in whatever business you have, but it is also very important to have an understanding of the lender or investors background, as to know how to best pitch your business in order to grow your business.

Sources:

Suster, Mark. The Four Main Things Investors Look For In A Startup. Bothsidesofthe                table.com. 6 October 2010.             http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-    that-investors-look-for-in-a-startup/

Zider, Bob. How Venture Capital Works. Harvard Business Review. November –           December 1998 Issue. https://hbr.org/1998/11/how-venture-capital-works

One thought on “Lender and Investor Perspectives

  1. Chris,

    I love the 4 M’s that an investor looks for before investing in a business. Recently I’ve been consumed watching the show Shark Tank. Each of the four “sharks” or investors analyzes the business plan pitch and asks questions that cover Management, Market, Money, and Momentum. I’ve never been a big television watcher but that show has helped me understand the process for undergoing an investment. It seems very detailed so if the time comes, I’ll prepare to be very organized when speaking with an investor.

    Great post and excellent job explaining investments,
    Danielle Glosson

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