When a business prepares for a meeting with new investors, it usually starts with the balance sheet and the business plan, believing that the financial information will speak for itself. However, what investors want to see from a young company is the business model and its future prospects, the market growth and the company’s ability to generate revenue from its initial customer base, all tied into a powerful equity story.
For example, Amazon, the largest e-commerce site in the world today, won over its investors even though it had and still has low profitability. Jeff Bezos’s vision was to grow to be the biggest e‑commerce site on the internet before becoming profitable. The investors shared this vision and after it went public in early 1997 it took Amazon over four years until it achieved profitability. Before its first quarter of profitability in Q4 2001, Amazon had raised nearly $1.5 billion of equity and over $2.0 billion of debt.
The equity story of a business needs to cover, beyond the financial data, three other key components to be convincing to new shareholders: the market, the product itself and the ability of the management to create a large business.
Market
Firstly, investors look at the type of market, young or mature, its size – more international makes a larger opportunity and the market position you expect to take with your product. Your projected ability to generate cash and recurring revenue within the market are key aspects investors are interested in. Looking at industry sectors, some markets are more fashionable than others. Currently, Software as a Service (SaaS) and consumer markets driven by smartphone adoption are two of the most interesting. Your equity story needs to link your business, either directly or indirectly, to a major market trend to be more appealing.
Your product
Secondly, venture capitalists like to invest in products or services that are innovative, with broad geographic potential and which could be a stepping stone to even larger opportunities. A me-too product or one without a disruptive idea will not be interesting even if you have good financial performance today. Ideally, the business idea will be both exciting and original, with the capacity to radically change existing markets.
Ability of the management team
Perhaps the most important aspect of the equity story is the quality of your management. You may have a great idea and a clear market opportunity but without a team who can execute the business plan the investors will never see a return. The individual expertise and experience of your team members is as important as teamwork and common goals. Serial entrepreneurs are favoured because investors find it easy to believe that someone can do the same thing twice. The management team needs to demonstrate its vision of the market and relentless energy to build the new business.
With these three components the equity story goes far beyond the financial information and the product idea. The strength of a young business doesn’t lay in the balance sheet, it’s in your vision, the business model and its potential to create value for investors in a way which they can believe. Investors expect a large amount of optimism but also want a realistic assessment of the risks. They have seen many too-good-to-be-true stories, but neither will they buy into a business offering only 15% return per year.
The equity story will attract new investors
You can use parts of the equity story in various types of communication; from a tweet, to an infographic, an elevator pitch or a full blown 40-slide presentation. What is important is to have consistency across all the media you use.
Investors appreciate the vision and market opportunity which successful entrepreneurs bring but want to increase the probability of success by working with an experienced and complete team with a realistic understanding of the risks. With a powerful equity story covering these elements you can convince investors to join your vision and invest in your business.
At Vie Carratt we specialize in communication plans to create awareness about your investment case with analysts, investors and potential buyers. Contact us to find out more about how to develop your equity story and promote it to potential investors and buyers.
By David Carratt, Founder and Director, Vie Carratt.