Fans of ABC’s Shark Tank will attest that certain questions typically asked by the investors sometimes stump the entrepreneurs seeking capital. Whether or not you plan to appear on the show, entrepreneurs should be aware of some of the information potential investors are looking for and be prepared to quickly and confidently reply to queries.
Richard Weinberger, CEO of the Association of Accredited Small Business Consultants (AASBC) and author of Propel Your Small Business to Success: Accelerated Actions to Maximize Profit offers insight into six questions investors would expect you to answer about your own business.
What were your total revenues in the last quarter and last 12 months? More important, what was your gross and net profit margin?
Any investor wants to make sure that when they invest in an entrepreneur, that this individual understands the nuts-and-bolts of the business – not just the product or service that the business offers. “Small business owners need to analyze their individual products or service lines because each one produces a different profit margin for the business,” says Weinberger.
Also, some products and services produce higher profit margin than others. “If they don’t understand which products and service lines are really bringing in the highest profit margins what they’re really doing is leaving a lot of profit on the table. If I’m an investor, I’m not interested in top-line revenue because I’m not getting a return on top-line revenue.”
How much equity and debt is there in your business?
This comes down to skin in the game. Investors want to see entrepreneurs who have invested not only their time, but their finances into their business. Entrepreneurs without skin in the game are at higher risk of simply walking away if things go south. “But let’s say I have $500,000 invested in that business, I’m not walking away from that if things get tough,” says Weinberger. “So any investor wants to understand how much equity is in the business and how much is borrowed money.”
Who is your competition, and why are you different and better?
The value proposition is an important thing to know and every entrepreneur needs to be able to effectively communicate what it is. Weinberger recommends knowing your competition better than you know your own business and suggests utilizing a SWOT analysis (listing the company’s strengths, weaknesses, opportunities, and threats) that exist in the business. “Once you’ve done the SWOT analysis, this leads to a strategic plan and it shows investors that you’re aware of threats and looking to make things better, because all businesses have weaknesses.”
How do you get your product from origin to destination?
While investors may not expect a small business owner to be an expert in supply chain management, they will expect the entrepreneur to understand what it takes for their product or service to get from origin to destination. “So the entrepreneur still needs to understand the entire supply chain management function,” says Weinberger. They need to look at the materials involved, transportation costs, finance and interest charges, the timeliness and every single component that involves cost, time or information.” A thorough review of a company’s supply chain management (SCM) system is something investors like as it can improve operations, lower costs, and reduce wasted time and effort.
How much cash are you “burning” through each month, and how are you going to use my investment?
The days when companies can get investors lined up with just a cool idea went away when the dot-com bubble burst. Investors want to know exactly how their money is going to be used, and how much cash is going to be “burned” each month. “Investors now want to know when they can expect to get a return,” asserts Weinberger. He recommends preparing a cash-flow budget and a budget variance report to understand differences between actual and predicted results.
How are you marketing your product or service now, and what changes do you see in the future?
The life cycles of a business continue to change as the business emerges from the formation stage and enters early and later growth stages – and marketing plans must change along with the business. “Marketing is extremely important because without marketing you can’t get the word out there,” says Weinberger. “What investors want to know is what kind of plans do we have to really market and the candidate has to be able to say they have a business plan and a strategic plan and within that strategic plan is a marketing plan.”