Financing small businesses through angel investors or venture capitalists is not easy. It usually means you have to prove your business can give them the kind of returns they’re looking for within five years.
Five years is the magic time frame. Getting an introduction and then an audience with angel investors and venture capitalists is only the first step to financing small businesses.
Whether your business can generate enough profit and growth to return ten or twenty times the original investment within five years is the key question.
Yes, the time frame matters. Five years is the maximum patience most investors have who provide financing for small businesses.
Remember, they’re not looking for average returns. They’re looking to make ten times their initial investment back. Early stage investors make the most money when they hit the most home runs in the shortest period of time.
Follow our Financing Small Businesses to learn how to approach an angel investor or venture capitalist. You will need to make sure your financial projections respect this five year horizon.
Angel investors and venture capitalists will focus on a few key factors: market demand,your business competitive edge, the competition, projected revenues, gross margin, growth rates, expenses and bottom line.
You must do a five year projection of these factors for your business.
Start with projected revenues or sales. These drive the whole business model.
Revenues are a function of the number of sales or transactions your business can generate and the price you will charge for your products or services.
Answer these key questions on revenues and gross margin: How many customers do you need to reach to make a sale? That’s called your closure rate. How many sales do you have to make to reach break even (when revenues and expenses are equal)? How long will that take? How much will that cost? How much gross margin will each transaction generate?
Next, make sure your positioning adds value to your customers. Always answer the question why your customers should buy from you instead of your competition. Know who your competition is and how you can beat them. If you can’t answer that question, financing for your small businesses will not happen.
Last, be sure to do an expense budget. Angel investors and venture capitalists scrutinize these numbers. The lower the expenses, the fast your business reaches break even and the faster they get a return on their investment.
Do your revenue and expense projections out five years. If you are having trouble doing that, contact the Small Business Administration for resources in your area. In many cases, the help is free of charge.
Just remember, when you create the budget for your business and do your financial projections, five years is the magic window.
In Your Corner