by Martin Zwilling |
Most new entrepreneurs assume that great investors will find their startups based on the compelling solution the founders have created. It does happen once in a while, but usually only for entrepreneurs who have already spent money promoting their efforts, and a large amount of precious time connecting with their peers and the investment community.
Others spend money on mailing lists and investor contacts and “cold calling” a few thousand people, hoping to find someone willing to take a risk on an unknown company. As an angel investor, I believe this approach is a waste of time, since no honest investor is likely to seriously consider a request for money from a stranger. There are just too many scams.
Thus it behooves every entrepreneur to optimize their investment strategies early, based on time and dollar costs, as well as odds of success. In all cases, due diligence is recommended on every potential investor and angel group before spending money you don’t have, looking for money you need. Here are some key recommendations to get you started:
1. 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.
2. 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.
3. Don’t be discouraged if your first try is not a success.
Finding the right investor is a bit like finding a spouse. 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.
4. 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. Investors are not interested in “mulligans” at this stage, since they don’t expect to provide money for restarts later.
5. 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.
6. 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.
7. 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.
In addition to the indirect costs, entrepreneurs are often surprised to learn that they may be asked to pay a direct fee to investor groups to cover research and meeting expenses, just for the slot to present their case. This practice has caused a rousing debate among both entrepreneurs and investors, with some calling it a scam, and others defending it as filter for serious businesses.
According to the Angel Capital Association (ACA), only about a third of its member groups charge any fee, and in all cases less than $500. Other well-positioned groups outside the ACA, such as Keiretsu Forum in Silicon Valley, charge up to $1,500. Registered investment brokers, who assist in business plan and presentation preparation, as well as sourcing investors, may expect a $10,000 retainer per month, as well as 5 percent of investor money raised.
Thus it always costs money to raise money, so plan ahead. I would recommend a budget of at least $10,000 to prepare documents for pitching, legal fees for term sheets and contracts, travel expenses and assistance fees.
Don’t believe the myth that finding outside investors is easy, an entitlement or even necessary. Even today, more than 90 percent of new businesses are bootstrapped. For determined entrepreneurs, there is always a way to earn the money and retain control, rather than face the biggest costs of finding investors: giving away part of your business.