Top Reasons Businesses Fail to Secure Investment
The disaster of being underfunded.
Failing to find investors can be disastrous for a business that is looking to get off the ground. Also for a mid-sized business needing to scale in order to compete in its respective industry. Investment is vital to the long term financial security of any organization, as well as in reaching its objectives and developing a strategy. However, investors usually stick to specific industries. With so many competing businesses out there all trying to win over the same relatively small pool of investors, getting one to dig into their pockets is no easy feat. It demands a significant amount of time and dedication as well as demonstrating operational excellence.
There are a number of reasons that small and medium sized businesses fail. While we don’t need to go over all the reasons here, we do need to address key factors. The major reasons include poor management, bad infrastructure, unsuccessful marketing pursuits, and flawed business model. For medium sized businesses it’s almost always lack of operational efficiency, let alone operational excellence. However, a lack of financial capital from investment is one of the key factors.
Here are some of the causes that result in a failure to secure investment.
Lack of understanding of a financial situation
Inexperienced, yet highly impassioned entrepreneurs have all the right intentions. But they often make the mistake of overvaluing their company and setting unrealistic expectations in the process. Because of this, most investors want to see a mature and realistic approach from business owners towards their financial situation. This will provide them with the confidence that they know what they are doing.
A company that has no clear and definable financial objectives will ultimately come across as poorly run, and will inevitably deter any potential investors from backing it. There is a key aspect to bear in mind that anyone making an investment will look for, and this is a quantifiable Return on Investment (ROI). ROI refers to a measure used to evaluate the efficiency of an investment as a percentage. It uses the formula: (Current Value of Investment / Cost of Investment) and this allows investors to weigh up the risk and reward and therefore make a more informed decision.
Investors may also look for a Social Return on Investment (SROI). This is a more contemporary concept. It takes into account social, economic and environmental factors and how their money can be used to create value in the community. However, this moves away from traditional financial considerations and it’s only with very specific investors where this becomes a factor. Most investors want to see operational excellence in the business they intend to sink their money into. As well as a plausibility of a very healthy ROI in the future.
Lack of a clear market strategy in financial terms
When seeking investment it’s all about the numbers. When a company is not able to define precisely where the business fits within a market and a quantifiable financial opportunity, it will be an immediate red flag for any investors. They want to see how the business in which they are investing will have an edge on the competition, and they want to see numbers backing it. They want to know about the target of a particular audience, and how this will turn a profit from their money.
Whether this stems from a lack of research into the market itself, or an attempt to solve too many problems at once, a failure to deliver exactly how your business will operate and become successful within any given market is highly unlikely to secure an investment for a long term project.
For business that are established in the market, the situation is often scale or die. These business must show the financial opportunity of scaling. They must be able to prove that if they grow, they will not just survive, but become a leader. Market research and competitive intelligence is key, and this must be backed by numbers. In these situations, numbers are evidence and the investor is the jury.
Poor risk management. A lack of clearly defined financial goals. Failure to place a business within a market in financial terms. Lack of operational excellence. These are all pivotal reasons why business owners lose out on securing money from investors. Being unable to convince backers that the risk they are making will yield an even greater reward will ultimately and inevitably deter them. Because businesses often need a cash injection at some point in their business cycle, failing to address these issues can cost any long term prospects for your business. Remember that your financials are evidence. If you’re seeking investment, build a good case.