We’ve all seen Dragons’ Den or Shark Tank, the show that sees aspiring entrepreneurs pitch business and investment ideas to a panel of venture capitalists. After every entrepreneur’s presentation, the “dragons” or “sharks” debate and deliberate the value of the product and decide whether these acclaimed business investors want to help with financing or partnerships.
Most of the time, entrepreneurs leave empty-handed and disappointed. It’s tough to pitch your business, especially on television. Plus, beauty and value are in the eyes of the beholder. What looks attractive and enticing to one person might be a bore to someone else.
The United States has the largest consumer goods and retail market in the world, estimated at $437.8 billion in 2015. There are 28 million small businesses in the U.S., and overall, retail accounts for around 20% of the economy. Yet less than 10% of venture capital investments go into retail and consumer packaged goods. It’s a tough industry to attract business investors — but not impossible.
In this article, we’ll look at ways to make your retail store look attractive to business investors. We’ll take a look at the biggest hurdles, review retail business basics, and provide tips on how to increasing your chances.
Let’s get started.
Why Retail Investors Are Rare
According to an article in Forbes, investing in retail can be great. Investors typically realize over three times their investment in an average of 4.4 years. Innovative small brands are emerging daily, and the industry isn’t overcrowded.
Yet, for some reason less than 10% of venture capital investments go into retail. Here, we’ll explore some of the common misconceptions about investing in retail. They include:
- Consumer and retail are capital inefficient
- Consumer businesses don’t grow quickly
- Consumer goods are fad-driven
- Consumer and retail companies are hard to identify
- Venture capitalists need grand slams
Now, let’s discuss why these assumptions are incorrect. First of all, it’s true that retailer brands have more revenue but raise less money, but retailers in general don’t require millions to get started like other types of businesses. Modern-day retailers can do more with less. For instance, they’re able to bypass traditional marketing and advertising campaigns by using social media, bloggers, and YouTube instead.
Online retailers have also been able to bypass the costly operating budgets required to set up brick and mortar locations, or getting placement on shelves at big-box chains. Now, emerging retailers are able to launch ecommerce businesses and in some cases, set up subscription box services, in order to reach customers directly. With low start-up costs and innovative ways to bypass traditional retail requirements (like expensive storefront leases), business owners are able to grow their companies much more quickly, which invalidates the second point listed above.
It used to be difficult for venture capitalists to find good retail companies to invest in. Think about it: stores and brands are spread out, and it can be tough to assess whether a business is the real deal or part of a fad that will fade in popularity later. Now, however, technology has made this so much easier, with online platforms curating promising consumer brands, the popularity of pop-up shops held at larger brick-and-mortar retailers, and the growing number of craft fairs that showcase dozens of local retailers in one space.
Finally, the idea that venture capitalists need grand slams — or huge deals that yield even bigger returns — every time they invest in a business is false. Those huge deals can also be huge risks. In retail, that’s different. As we mentioned earlier, retail companies require a lot less to get started, therefore they need much smaller investments. Smaller investments, in turn, mean there’s less to lose, and in an industry where there’s still plenty of room for growth, that makes financial sense.
Preparing Your Business For Investors
Now that we’ve gone over some of the hurdles retailers face when it comes to attracting investors, let’s discuss how to prepare your business for investors. You want to make your company look attractive to potential investors, and that means ensuring you’ve got all the basics aligned.
You’ve got a strong business plan and you know your business model works, but do you know how much your company is actually worth? If you want to attract investors, whether it’s in terms of a financial contribution or a business partnership, it’s important to put a price tag on what you do. Here’s a helpful article on the Canada Business Network website on different ways to put a value a business.
WRITE YOUR BUSINESS PLAN Need some help putting together a business plan? Check out our comprehensive guide.
Another important factor to consider is how your business looks to potential investors. Investopedia suggests using the “four Rs of retail”:
- Return on revenues, which includes a balance sheet and cash flow statement
- Return on invested capital, which refers to the profit generated per store
- Return on total assets, which tells a company how much operating profit it’s making from its assets
- Return on capital employed, which tells a retailer how efficiently it’s using its capital
The faster a retailer is able to recover the initial investment of launching a shop, the sooner it can focus on the four Rs of retail. When combined with other financial metrics like store sales, these four Rs help paint a successful business story.
Understanding Your Target Investor
It’s just as important to have a full picture of who your target investor might be as it is to know all the nitty-gritty details of your business. There’s no point in writing a generic pitch — that won’t do you any favors. Instead, tailor your pitch and only pitch to investors that fit your target criteria. Better to pitch only a handful of select investors that are a good fit rather than sending a generic pitch to dozens.
The thing is, finding a good match for your business is like entering a marriage. Ideally, you’ll enter into the relationship with similar expectations and enjoy a positive, lasting partnership. An article in Entrepreneur offers some useful insights when it comes to understanding your target investor.
- Investors want equity ownership, not causes. This is a business partnership, after all. Investors want to make money.
- Investors bring more than money to startup businesses. Consider their expertise and connections, too. Sometimes their network is just as valuable as their financial investment.
- Investors prefer strong teams to big ideas. Consider who else is supporting your business and who you have working for you.
- Early-stage research and development is not enough. Don’t even think of approaching investors until you have a proven business model and preferably a handful of real customers.
Similar to knowing who your target customer looks like, having a good sense of what you’re looking for in an investor is vital to any retail business. Do your homework and it’ll pay off in spades later.
Where to Find Business Investors
Depending on your niche, there are quite a few avenues for retailers to connect to potential investors. Here are a few places to do some outreach:
- Startups.co: This platform is built to provide a wealth of resources and support for registered startup business. Its sister site Fundable has reportedly helped business raise more than $250 million in funding commitments across a gamut of industries.
- AngelList: Another platform that offers entrepreneurs to connect, job postings, as well as ways to connect to angel investors.
- Small Business Administration: As the small biz arm of the U.S. government, the SBA offers a wealth of resources, including a list of lenders, information of loan programs, and a venture capital program.
- Investment Networks: These platforms actually help match entrepreneurs and funders. Try the Canadian Investment Network or Endeavor, to name just a couple.
- Incubator Networks: To help your small business scale up quickly, consider applying for an incubator. The National Business Incubation Association has a search tool that can help you find local incubators in your area.
While this isn’t a completely comprehensive list, these are a few resources to help entrepreneurs explore their options when it comes to outside financing.
Tips And Tricks to Attract Business Investors
Now that we’ve covered the hurdles, how to prepare your business, and the importance of understand your investor, we’re going to leave you with some tips to help get your retail store funded.
Court Investors That Understand Retail
Retail, whether you own a brick-and-mortar store or an ecommerce business, is a unique industry with its own sets of rules and challenges. It’s important to isolate investors who have experience in the industry, otherwise you’re likely wasting your energy. At the same time, don’t take money from an investor whose vision doesn’t align with yours. As we mentioned early, you hopefully have a long business relationship ahead of you, so it’s vital to see eye to eye.
Ask Someone With Business Experience To Help
You own a business, but you can’t be expected to be an expert on everything. If you’re feeling less than confident on creating a pitch deck and speaking the lingo that investors typically use, ask for help. A friend with an MBA would do the trick, or reach out to others in the retail community who have successfully pitched their businesses.
Emphasize Your Strengths
Launching a retail store is no easy feat. It takes loads of hard work, determination, and dedication. You know what your strengths are and now it’s time to share it with others. Whether it’s creating a completely unique product, styling and marketing your goods, your business acumen, or your talent at finding other talent, tell your investors why you’re worth investing in.
How Will You Find Business Investors?
Now that you have some ideas on how to obtain outside financing from business investors, it’s time to get started with prepping your business for pitching.
Have you worked with business investors? What was the process like for you? Share your thoughts in the comments below.