A stakeholder is any person or organization that has an ‘interest’ in your business. But what does that really mean? How can you get investors hooked? And what kind of money can you expect to raise for giving away percentages of your business?
As a business expands and starts earning more money, it will be forced to make some serious decisions. While you might have been operating as a sole trader or limited business, there will come a time that you need to invest more money in order to expand your operations. If you don’t have that funding available yourself, then this could mean trying to find it elsewhere.
It’s at this point that a business will enter the funding process and begin looking for stakeholders.
But just what is a stakeholder? And how does a stakeholder differ compared with other forms of investor?
A stakeholder can be a person, a group or an organization that has an interest or a concern in your business. That means they will have purchased shares in your business, which will give them the right to vote on certain key decisions and will mean that they stand to gain or lose depending on the success of the organization.
One type of stakeholder might be an angle investor. This is a well funded individual who will provide capital for a start-up. Angle investors will often also provide advice and consultation and may wish to be involved in key decisions.
This is in contrast to venture capital. Venture capital is money that is often provided by individuals, banks or investment firms to companies that are believed to have long-term growth potential. Venture capital generally involves much larger sums as compared with angle investment which tends to be reserved primarily for ‘seed funding’. It also tends to be considerably less ‘hands-on’.
Typically a business will go through several ‘funding stages’:
Pre-Seed Capital: This is money that is acquired at the earliest stages of the business, usually in order to invest in crucial equipment and resources. Often the product or service will only be at the prototype stage.
Seed Capital: This is the point at which the idea turns into the business. You might be all set up and ready to go before looking for the funding you need. This is when some entrepreneurs will turn to crowdfunding or even a program like Shark Tank!
Growth Stage: After the initial launch, the company enters its ‘growth phase’. You now have a good idea of your product, your market and your projections. It’s often easier to get funding from angels at this point because you have a proven commodity.
Series A, B, C: During Series A, B and C, you wills tart to break up your company and give away larger numbers of shares for bigger numbers. This is the point at which venture capitalists and investment funds might start to become interested.
IPO: Finally, the IPO is the ‘Initial Public Offering’, at which point members of the public can start buying shares in your brand and become stakeholders!
Pitching to an investor is an incredible scary process for numerous reasons and is essentially like trying to get validation for your dreams. You come up with an idea that you think could really change the world - or at least make for a profitable and successful business - but then you need to turn to someone else to get backing. Their backing will not only give you the money you need to take your idea into the wide world, but it will also show you that your idea is worth believing in. It means that industry experts believe your idea can work, and it means that they believe you are capable of making it happen.
But most start-ups and entrepreneurs looking for funding will never have launched a business before and will never have spoken to investors. How do you go about making your idea sound amazing to these experts, how do you avoid going to pieces, and how do you know what they're looking for? Read on and we'll cover the basics to help you get started.
Do Your Homework
The first thing to do before pitching to any investor, any buyer or any business partner, is to do your homework. That means researching both them as the investors, and making sure that you have done all the calculations relating to your own business model and profitability.
In terms of researching the investor you need to find out what kinds of things they tend to invest in, what their areas of expertise are, and what kind of control/involvement they tend to want in the business. In terms of your own business, you need to ensure that you have worked out your cost per unit and that you have calculated a wholesale price and RRP and thus know your profit margins. Then you need to work out your projected sales so that you can calculate how much you expect to make by the end of the first and second year. This should be offset against your initial costs so that you can work out when you should break even, and you need to back up all these expectations by doing extensive market research which will have guided your pricing and your projections and which should prove there is a market out there for what you're selling. The more thoroughly thought out your plan is, the more you will inspire trust in your investors.
Show Your Passion
That's the technical part and is a necessary evil that you need to go through in order to win over investors. However, this is not the magic bit that will get them excited for your product and win them over despite reservations - that's all about how you present, how you get them to believe in you, and how you demonstrate the value and the power of your product.
And to do this you need to think about your value proposition. That's the way in which your product will make lives better - are you selling a lifestyle? Are you making work easier for people? Are you liberating them? Talk about your mission statement, your goals and what you really hope to achieve and just maybe your enthusiasm will rub off…