Definition: Investment Value proposition refers to a set of business statements that a company uses to summarise why an investor should take part in the investment offering – which can be in the form of an elevator pitch.
These statements convince a potential investor that their investment product will provide greater value than other similar offerings. The statement would usually focus on the monetary value, how funds will be used, and the expected result. The value may be derived from non-financial gains, such as sustainable, responsible and ethical aspects. Whereas in some cases the proposition can be obvious, such as a secured loan or a B2B financial product, with private equity investments, it’s sometimes not so clear.
“An investor looks for a great entrepreneur, the business comes after that. For instance, [say I met you and] you’re a great entrepreneur but I’m not interested in investing in your sector, then I would be happy to introduce you to my colleague or another investor who might have an interest in this sector. We look for bright, passionate, experienced businesses owners with a track record of achievements.”
- CEO of the UKBAA, Jenny Tooth OBE
Below are 6 themes which all contribute to a good value proposition
A Well-Defined Business Model & Business Plan
Having a complete, credible and clear business model is important for any startup as every investor believes that any startup without a concrete business model is on the path to failure. Having a well-defined business model demonstrates that the entrepreneur knows about the market and is ready to take the leap forward. Market research, idea validation, building a prototype, validating that prototype, and testing the model in a sample market is essential to validate the business model.
A business plan is a strategic plan for the business’s future. It states the future goals and the routes the business will take to achieve those goals. An investor always wants the most out their investment and invests only in a startup which has its priorities straight and a business plan in line.
Team’s Capabilities & Experience
Building a capable and experienced team is one of the most crucial tasks of a startup. Investors believe the investment carries less risk if your team has strong managerial skills, a good chemistry, and a decent level of experience in your sector.
“My criteria to invest are the founders. So, I won’t check any business plans, any economic projections, spreadsheets; but (instead) I focus on the founder’s mindset (and) passion.” – Taizo Son, a successful investor in startups
Market matters as it signifies growth. Investors want to have a deeper look at your market. They want to see the potential of growth in the existing market and if your startup has the resources to accommodate a new growing market.
Dave McClure, founder of 500 Startups says:
“Market size matters because most investors want to know that you’ve got a big business. Bigger is generally better.”
The Level of Commercial Traction
Quantitative evidence of market demand is always preferred over a prediction. Showing the investors that you and your team have already taken action to build upon your business idea and the business has some clearly identifiable momentum and progress, will not only motivate them to invest in your startup, but also make negotiations easy for you.
If the Month on Month (MoM) or Year on Year (YoY) progress is steady, it is seen as a sign that the startup is performing well. Mark Cuban, an investor in Dallas Mavericks, says:
“When it comes to business, there is a simple scorecard. Are you making money or are you not making money? Are you succeeding or are you not? So, when you go to raise money, always, always catch yourself and eliminate the backstory.”
Investors look at how much you can convince them to take a leap of faith. Empathy based on similar educational or career background, trusted co-investors, instinct or even impressions can prompt investors to think about the investing decisions. The best way you can pass this is by being truthful and confident while having a good knowledge of the background to the investors. A startup might not be on a par with other businesses but sometimes the X-factor could make a difference.
Jack Ma of Alibaba investing in Paytm is one such example of the investor-founder connection as the founder considered Jack Ma as his role-model.
People often misunderstand the term ‘Exit Strategy’. The ‘exit’ in exit strategy refers to the money and not at the exit of the entrepreneurs. This means that the startup brings in the money and the investors get the money out. Therefore, every investor looks into the exit strategy of the startup. The returns are provided by the exit.
The exiting of the investors usually happens in two ways. A bigger company acquires the startup for enough money to give the investors the invested amount or the startup develops and flourishes enough to sell shares of stock to the buying public over a public stock market – as happened with Facebook in 2012 and Twitter in 2013.