The start-up diaries volume 4: You know more than they do!




In this series, "JJ", SAN's very own secret hotelier, brings us the ups and downs he encounters in his most ambitious challenge to date, the launch of a new aparthotel brand. Here he shares his thoughts on dealing with investors.

So you have spent years working at various organisations, you have a great idea of how to provide a solution to a problem, you prepare your deck and start thinking about going out to investors.

Now take a deep breath and be ready for anything and everything.

I had my first experience of dealing with investors at the age of 23 when I raised money for a start-up internet business back in 1999 (over 20 years ago!). I must admit, it was almost too easy. I had no idea what I was really doing and people just saw £ signs and were all too ready to hand over money. Looking back, it probably was to the detriment of the business' potential as being interrogated by investors makes you put into perspective your strategy and game plan.

What did I learn from my internet experience? That raising money does not make your business a success. As soon as you raise your funds, you start working towards either being lucky enough to generate excess cash quickly enough to fund growth or having to think about your next fund raise.

Some eight years later I moved into the world of hospitality and dealing with real estate investment professionals.

I had an idea for a new operational hospitality business. It was built around design, technology and sustainability.

I found that compared to technology investors, who look at the opportunity, real estate investors look at the risk. This is a big buck business, involving tens of millions for a small hotel. The big difference is that it's underpinned by an asset, if it doesn't work, you lose some money, in most cases you make less money than you forecast. Very different from tech which is pretty much an all or nothing game.

In the hospitality world you don't find many 'operational investors’ therefore you have to deal with real estate investors - who love anything that can be abbreviated - IRR, AGAR, MOIC etc and can wow you with various scenarios that in most cases are very unlikely to happen, in order to find a way of not doing a deal!

This is the counter point to the person who is sitting across from them at the table, the one who is looking at the solution and the opportunity of building a business that has the potential to earn above market returns, but only if the investor believes in the vision for the brand and the business model.

What I have found is that investors want proof of concept. In some cases, this can be really small. When I started my first hospitality brand I struggled until I had 12 apartments, which enabled me to demonstrate, in facts and figures, what I had been saying all along.

Why is this? The entrepreneur will always know more than the investors about the market, your customer and the competition. So the best investors interrogate every aspect of your business to ensure this is the case. Even then, they do not want to take a risk, 99 per cent of them want to see it working and then jump on for the ride.

Seth Godin talks about "shipping it" - get your product in a box or put your service out there and see what the feedback is and adapt it accordingly. Look at Airbnb - they got their product out there, it flunked, until one of their customers put an entire apartment on their site for rent (not just an airbed in sitting room) and they never looked back.

Whatever you are doing, whatever you are planning, don't wait for it to be perfect - start it, roll with the punches and make it better. This is what investors want to see, someone who has taken an idea, knows the market better than they do, has a strong business model and a way of executing it.

You just might have an investable idea and you could find that one individual who is prepared to say, "how can we help you make this even better?” Then you have found not only capital but a rare specimen in the shape of an investor who understands how to maximise the opportunity sitting in front of them. There are not many of them but they are out there - you just need to keep knocking on doors and remember...you know more than they do!

 

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