The glamor associated with raising angel or venture capital for startups is a far cry from reality. For every outrageous funding round (see: Uber) there are hundreds of thousands of entrepreneurs who are fighting tooth and nail to finance their company with outside capital. So before embarking on this journey, keep in mind the following:
1. Do You Need to Raise Capital?
Not all businesses require outside financing. As my partner Nick always says, “Do you know what non-startups call cash flow businesses? Businesses.” The goal of your business should be to solve your customer’s problems. If you are able to transact a customer and use the revenue and margin to finance your own business, it will be the cheapest form of capital because you do not have to pay any interest or give up any equity for it.
That said, there are always exceptions. If your business has excellent unit economics (the return on capital invested is high), you can raise capital where the appreciation of your value far exceeds the dilution. And finally, if you have a massive user land grab opportunity (see: Snapchat), then outside capital is required.
2. Sell the Validation, Not the Solution.
Pitch decks and demos boast a laundry list of product features that are guaranteed to best the competition. Product features in 2015 are the 2001 version of pitching an idea. The best entrepreneurs are the ones who can mitigate risk, not chase it. Likewise, investors are trying to mitigate their investment risk. They love investing in big ideas but are going to do their due diligence to see the likelihood of execution. To that end, when you are meeting with investors, share the validation you have received from your users – even if only on a small sample size. If they can see that you are able to operate and execute (see: running through brick walls) they will be believe that you are the one who can chase the next big thing.
3. Understand the Investor Funnel
I teach a class at Chicago’s Startup Institute, which is a startup training program for aspiring developers, designers, marketers and sales. And I implore each student to remember that while sales may not be the sexiest track, it is the most necessary. If a founder cannot sell the opportunity or the dream of their vision to a co-founder, CTO, development team, first customer, or investor, they can’t build their company. So it is important to apply the same sales strategy that larger sales organizations use when addressing fundraising:
Acquisition. Soliciting capital from people you do not know is akin to approaching a stranger and asking for money. Prospect your target investors, and find investors who can advance your cause beyond just capital. If you are in the SaaS space, find a SaaS investor. Smart money endures past funding. Once you’ve identified who you want to target, find your investors where they currently are. If they are active on AngelList or LinkedIn, facilitate a warm introduction via a mutual connection. But if you don’t have any mutual connections, be creative in your approach. Engage them socially by writing a blog post targeted to them. Have a tangible product? Send them a sample. Importantly, start acquiring potential investors BEFORE you need to raise capital. The old adage is: if you want money, ask for advice and if you want advice, ask for money. If you believe you need capital in 6 months, start prospecting 3 months ago.
Engagement. When you have the meeting with your investor, invest in two things:
(1) Diligence on the investor. Read everything you can on the investor: blogs, twitter, press, LinkedIn, their company, their past investments – everything. You want to have a sense for the investor’s point of view so you can be proactive in your conversation and be prepared for their questions. You also want to be aware of their typical investment sizes. Of course, it can’t hurt to compliment them on their successes or discuss a shared interest!
(2) Your presentation. See point 2 above. Investors want to know the following: team, problem, validation of problem, solution, validation of solution, opportunity, business model details (how it works), how you make money, how you acquire customers, use of funds including cash burn and what the return on the cash is, next steps, and the ASK. The Ask may not be published in your presentation, but you should know what you are asking for and why. Remember: if the conversation didn’t go well, make sure you ask for something else like feedback on an strategy or an introduction to someone they know. But oftentimes, the investor will only care about (4) below: you.
Conversion. After you’ve engaged an investor – whether via an introductory meeting or a direct ask, be sure to follow-up. In the former, send monthly updates that highlight progress and opportunity. For the latter, make direct follow-ups: “Can I count on you to support _______?” Investors also like social proof; if other investors are investing or there is a large customer win, make sure your prospective investors know. Once an investor has confirmed, be diligent in your follow-up and execution of documentation. In other words, have your ducks in a row. Nothing is worse than having a commitment and losing it because legal took months.
Referral. Similar to the above, ask your committed investors for introductions to other investors. Be specific in the request for introductions.
4. THE INVESTMENT IS IN YOU, the team, the target customer, the opportunity, the product. In that order.
People create change. An idea never changed the world.