Most entrepreneurs assume that great investors will find their startups based on the compelling solution they have created. This happens only occasionally. Entrepreneurs are always short of time. They can’t pray and wait till someone finds them. Every entrepreneur needs to optimize their investment strategies, based on time and costs, as well as odds of success.
Understand What Investors Want
If you decide your business can only get to the next level with the aid of a professional investor, then you need to figure out what a potential backer looks for in a budding company. When you talk to an equity investor, you’re trading shares of your company that an investor can later sell. To that end, you need to show how your company is on a path to a ‘liquidity event,’ industry parlance for an IPO or acquisition where the investors get a return on their money. Since not every company will actually go down such a path, many investors use a portfolio approach, where they hope to spread their risk among several bets.
Investors evaluate a company’s potential along four key criteria:
- Does the company’s product or service address a large and growing market need?
- Can the company scale quickly enough to take advantage of that market opportunity?
- Does the company have a defensible competitive advantage?
- Can the management team execute on the potential outlined in the first three criteria?
If your company passes those four tests, your next assignment is to prune down the list of investors who might be interested in your company. To do so, understand that the private company equity markets have become very fragmented. There used to be just venture capitalists, now there are angels, super angels, micro-VCs, VC, and growth investors. As an entrepreneur looking for capital you need to know where on the spectrum of investors your business falls – and target the right potential investors.
So how do you know what the right fit for your business is? Start by networking and building relationships even before you set out to acquire funding. VCs prefer introductions to new ideas from people they trust as opposed to receiving cold calls from entrepreneurs. The best introductions come from successful entrepreneurs, especially ones that have worked with the VC before.
Your networking should include professionals working for companies similar to yours. Look for news in your industry about investments and acquisitions involving companies in the spaces closest to yours. The goal should be to target investors and even large companies who look for opportunities in your space. Look for investors who have backed public companies in your space. This is a multiple step process that works you back to the investors who have made money in the space. This is essential because investors like to invest in areas where they have developed expertise.
Use social media to boost networking. Use news sources and LinkedIn to find people who are connected to an investor target and then tap them for feedback and input on the business and ask what they think investors or buyers might like and dislike. If the chemistry is right ask them for an intro. And if it’s really good, ask them to consider the possibility of a formal role as an advisor.
Plan for adequate time to find an investment.
Don’t wait until your startup is out of money before looking for an investor. Potential investors can sense a desperate entrepreneur, and see it as an indication of poor planning, more than an opportunity for a great bargain. Count on the investment process to take three to four months.
Use initial feedback wisely to improve your case.
Investors are buying your business, not your product. The right investor will have specific feedback on pricing models, distribution and market positioning to improve scalability. Listen and ask for that feedback, rather than debating it. Update your materials and message after every pitch.
Don’t be discouraged if your first try is not a success.
Look for someone with the right chemistry and complementary insights. It’s unlikely to be the first investor you encounter, no matter how beautiful your story. In my experience, finding the right investor will take several months and rejections.
Practice with advisors and friendly investors before tackling the big guns.
As they say, you only get one chance to make a great first impression, so don’t pitch to a key angel group or venture capital team for practice.
Don’t be a total unknown to every investor in a meeting.
Through peers, social media or connections, make every effort to meet one or more of the investors before the actual pitch. Entrepreneurs who are not known by at least one investor are presumed to have not done their homework.
Weigh the cost of every pitch against the potential return.
You can’t pitch to every investor or group, so consider the odds, travel expenses and fees of every opportunity. Don’t be afraid to ask an investor group leader for its track record, sweet spot and connections to startups funded. Follow up to learn expected terms and process time.
Temper your approach based on the stage of your startup.
If your startup has a proven revenue model, real customers and is ready to scale, approach the best investors even if it costs you more money. For new entrepreneurs looking for seed-stage help, concentrate on investors who know you or organizations with a vested interest.
Share Your Vision
Once you’ve finally made some connections to investors who likely understand the kind of company you’re trying to build, you then need to whittle it down to those who share your vision of what’s possible. You need to find investors that buy into the assumptions you have made about the future. If you don’t share the same common view of what’s possible, an investor won’t invest with you.