Win over investors and grow your business
TRANSFORM your business idea into a multimillion-dollar success story by aligning your buisness to secure investments. Maria Daniel, EY sustainability lead partner, strategy and transactions, shared her expertise on what business valuators look for before investing in start-ups, during a recent EY Entrepreneurship Academy titled Building a Masterpiece.
“The first thing that I like to understand in a business, especially entrepreneurial start-ups, is what this company is trying to solve,” she started.
In a packed room of small and medium-size enterprises (SMEs) eager to secure investment, Daniel shared her expertise on how to win over investors and build a thriving business. With over 50 start-up valuations under her belt each year, Daniel provided actionable insights to help SMEs craft a compelling business proposition. Her guidance covered the essential elements of a compelling business proposition, from identifying unmet needs to developing innovative solutions with regional impact.
“What we see a lot in the Caribbean is that we hear about problems, or we hear about solutions or their technological solutions that somebody solved somewhere else in the world, and we think we can just duplicate it here,” she said.
When sharing her personal valuation standards Daniel revealed that she, like many valuators and business investors, considers the following key factors: the business solution itself, the number of competitors offering similar solutions, and what sets the business apart from others. According to Daniel, many start-ups fail to adequately assess their market and evaluate who would actually want their product or service, relying instead on their own personal preferences to make decisions about what to sell. Using the rise and fall of Blackberry as a cautionary tale, Daniel engaged the audience with its story. In just 18 months Blackberry went from being on top of the world to plummeting. The turning point came with the release of the iPhone. Daniel revealed that a single shareholder’s comment, “I don’t want a phone without buttons, and nobody’s going to buy that,” epitomised the company’s misguided thinking. This narrow-minded focus on personal preference, rather than understanding the target market, ultimately led to Blackberry’s downfall.
Next, valuators look for a tested hypothesis. While entrepreneurs may think they have the solution to a problem, Daniels challenged them to answer the question: Are you taking steps to validate that your solution addresses the real issue?
“What are you trying to achieve? Are you targeting a niche audience or offering value for money? What is your ultimate goal?” Daniel asked.
According to Daniel a hypothesis often requires a prototype, which doesn’t always necessitate a significant upfront investment. She cited Sara Blakely, the inventor of Spanx, as a prime example of someone who spent $5,000 US on a prototype.
“She took her idea, tested it, secured a distributor, and now she’s a multimillionaire,” Daniel explained. “And it all started with a simple solution to a common problem — slimming down bulky stockings.”
According to Daniel, taking these steps makes ther business more likely to gain investors. When a business is already up and running, with established revenues and operational expenses, it’s considered to be in full production. However, every step before that adds risk for potential investors. If an entrepreneur only has an idea and no prototype, they’re asking investors to take a significant leap of faith. Most entrepreneurs have ideas but lack the funds to turn them into reality. As you progress, the valuation and equity value increase. However, many start-ups skip a crucial step: developing a solid business plan. As a valuator Daniel’s first question to entrepreneurs is about their progress towards their business plan targets. This is because start-ups lack historical data, and even if they have some history they’re still in the growth phase. As a result, the only way to assess their value is by evaluating whether they’re delivering on their promises. She said that when a business successfully raises capital, valuators ask, “Where are they in terms of achieving the milestones they outlined during the last funding round?” Valuators also assess how effectively the business reaches its target audience and allocates resources.
“If every time you raise capital you only spend it on operational expenses (OPEX), I’ll tell you, you’re not going to last very long. Your capital should be used to solve problems, improve technology, and position your business to generate revenue,” Daniel emphasised.
For Daniel, the entrepreneurs themselves are a crucial factor as she’s investing in their vision and potential. She looks for passion, dedication, and a clear vision. While Excel spreadsheets can make any business idea appear valuable, it’s the substance behind the numbers that truly matters. An investor wants to see confidence in cash flow projections. Additionally, Daniel emphasised the importance of assessing the market in which the business operates. In the Caribbean, where markets are smaller, she advises entrepreneurs to think creatively about how to generate value while maintaining profitability, as what works in other parts of the world may not necessarily succeed in our regional environment.
“So what I would ask all of you to do as entrepreneurs at different stages of your journey is to start thinking not just domestically but regionally, to begin with,” she advised. “Then think about how to expand beyond regional markets. And you really need to understand that once you enter larger markets the competition is fierce. What do I need to do to bring something to the table that will make me a differentiator wherever I go?”
