To earn "investor confidence" you have to understand the two factors at work in the subconscious minds of potential investors as they considered an investment in your business: confidence and risk. Your job as entrepreneur or business owner is to raise confidence and lower risk. If you successfully do that, you'll earn their investment.
Addressing the confidence factor.
Thanks to Enron and WorldCom and the proliferation of scams, today’s marketplace is filled with gun-shy investors jaded, skeptical, and weary. Weary of getting ripped off. Jaded from dishonest business people. Skeptical of business deals that sound too good to be true. In short, investors are generally in a defensive investing position.
As a result, investors tend to either do nothing or to stick with their current relationships, even if the relationship isn't all that great. They figure it’s safer to stay in a so-so deal than risk making an investment in a new company.
You can probably mentally validate this in your own personal investment habits. Have you ever gotten fed up with a company you've invested in, sought out analyst and broker reports looking for something better, then frustrated and exhausted, meekly returned to your original investment because of a perceived lack of better options? We all have.
The reason for this is the Investor Confidence Gap. This Gap exists when an investor can't distinguish if one investment option is any different or better than another. There are many different reasons for this; from a dramatic increase in the number of investment alternatives to the biggest problem--a blatant lack of confidence and trust in your business plan and your ability to execute it.
The big question, then, is how do you overcome this? How do you build investor confidence?
There are three key concepts to building investor confidence. You must do these if you want investors to trust your business plan enough to invest in it. Simply stated they are: show investors that you know what your customers want and know how you'll give it to them, and then communicate to your investors how what you do is unique or better in a way that is believable and embraceable.
First, know what your customers want. Start with the basics. Ask your current, past, and prospective customers what they want in your kind of business. Don't just ask: "What do you look for in a fitness center… or in a metal fabricator… or whatever your business." Put some thought into your questions beforehand.
The goal here is to identify some of the problems customers encounter when doing business in your industry. This will help you figure out your value proposition, which is the implicit promise you'll make to customers to deliver a particular combination of values--price, quality, performance, selection, convenience, and so forth. Validate your value proposition by confirming with customers that the value you intend to provide is the value they're willing to pay for.
The second step to gaining confidence is to know how you're going to give your customers what they want. This is your operating model. The combination of operating processes, management systems, organization structure, and culture that allows you to deliver on your value proposition. It's the systems, machinery, and environment for delivering value.
In today's competitive marketplace, if you want to win the hearts, minds and wallets of your investors, you've got to have an innovative operating model capable of delivering 50%, 100%, or 300% more value than your competitors. Otherwise, investors will find it difficult to believe that your business is truly unique, or your competitive position sustainable.
The third step to gaining investor confidence is explaining to investors your unique value proposition, and how your operating model delivers on it, in a way that is believable and embraceable. This is the concept of market perception. How investors perceive the way you communicate your value proposition, and the operating model to deliver on it. It's how you bridge the confidence gap to ultimately gain the confidence of your investors.
How it all works together.
Each step merely represents one of the three keys to effective communication. Have something good to say. Say it well. Say it often. Find out what your customers want. Figure out how you'll give it to them. Then, tell your investors what your unique value proposition is, and how your operating model delivers it, in a way that is believable.
Your value proposition, operating model, and market perception are simple concepts to understand. But as simple as they are, they are often overlooked when developing and communicating a business plan. Nevertheless, they are absolutely essential to building investor confidence, and getting your business funded.
Mike Elia is a chief financial officer and an advisor to venture capitalists and leverage buyout specialists. His business plan ebook "Business Plan Secrets Revealed” shows how to make your business the most appealing investment choice to venture capitalist, bankers, and other business investors. Click here to learn more about earning investor confidence.