November 24, 2017

Factors that Attract Investors to a New Business Idea

PE AFRICA

By Telford Aduda

An investor is a person who allocates capital with the expectation of a future financial return. Types of investments include: equity, debt securities, real estate, currency, and commodity derivatives such as put and call options. There are two types of investors; retail investors and institutional investors.

Retail investor include: individuals gambling in games of chance, individual investors, and collectors of arts, antiques and other things of value, angel investors and sweet equity investors.

Institutional investors include: venture capital and private equity funds, business that make investments, investment trusts including real estate investment trusts, mutual funds, hedge funds and sovereign wealth funds.

One of the biggest challenges faced by entrepreneurs especially upcoming ones is knowing how to attract the investor. The following are some of the important factors that attract investors;

1. Profit

Your idea, business plan or invention may be good and attractive. However, the investor’s biggest interest is the returns to be made on his or her investment. Can your business make profits and how soon?

2. Investors return

Investors from all corners of the world will always try to get the best deal possible. They always look for a sizeable amount of equity in the company. When asking for money from an investor, you have to show that the idea, invention or business plan can provide a better return than the bank or stock market. What are you offering the investor in return?

3. Trust

Investors are human beings and humans will most likely write cheques to people they trust. As with any relationship, this trust is built over a time. An investor must feel comfortable handing over a cheque to an entrepreneur. Investors will always want to make sure the entrepreneur is committed to the long term relationship. Investors are not interested in an entrepreneur who may drop the business altogether if another hot and promising prospect appears. They are more likely to invest with someone they feel they can grow together with business-wise.

4. Scalability

A scalable idea is that which could grow rapidly to become the next multi-billion dollar enterprise. Even though not every business has such growth, investors are by nature more attracted to opportunities of this kind. Investors are always looking to double profit on their investment. Businesses that require a major human capital can grow quite rapidly, however, demonstrating how your business can scale without massive additional infrastructure will make it stand out to investors.

5. The right team

This is one of the factors which investors consider extremely important when entering into an agreement. Most investors will look for a solid team with the background and experience needed to execute an idea. As an entrepreneur, make sure the team is competent and capable of doing the job. Where possible, have a prototype to show investors so they know you are not building castles in the air and the team can really do the job.

6. ‘Skin in the game’

This is a very important factor investors take into account when considering an investment. The thinking is always simple, “you want me (the investor) to risk my capital to bring your idea into life. How much of your own capital have you put at risk to make this idea happen?” If the answer is zero, the investor will most likely not fund your idea.

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