How can you spark investor interest? What type of investors should you consider and how do you close? Every entrepreneur has searched for answers to these questions at one point. Part three of our series ‘Business Funding’ is dedicated to pitching to investors.
For a growing startup, fundraising is crucial for survival but the process entrepreneurs endure is complex. With the startup investing scene continuously evolving, founders now have more options to fund their business than ever before. With all these available options, how do you close a deal with a potential investor? In this part, we cover some useful tips that will help you secure that funding.
1. The Decision Making Process
The first thing you need to know is the difference between VCs and Angels. VCs invest other people’s money through a fund while angels invest their own. Accordingly, the decision making process is different.
In the case of Angels, decisions tend to be much faster as it’s an individual decision. Most angel investments are also driven by believing in the entrepreneur and their vision. A lot of angels will also form angel groups to look for leads, perform their own due diligence, and often organize pitch contests.
VCs on the other hand require more time, more meetings and follow-ups, lengthy due diligence process, and will involve multiple partners before the final decision. VCs tend to have an investment philosophy focusing on a sector or a stage.
With crowdfunding evolving from its traditional reward based model (like Kickstarter) to equity and debt crowdfunding entrepreneurs have a variety of options to choose from. The crowd’s decision is mostly emotional but it does help you build followers around your brand.
2. Prepare for Investor Meetings
As much as your product, service or company are important, your story as an entrepreneur also matters, especially at the early stage. In the early stages, investors tend to invest in you, your team, and vision for the company. Your story should include your team, how you met, what made you start the business, your passion for what you’re doing and your relevant field experience that makes you the right person to drive this vision forward.
3. Straightforwardness is Crucial
No one knows the answers to everything. Investor meetings tend to be lengthy and involve a lot of questions. It’s okay to not have answers for some questions, especially in the early stages. Investors would appreciate your honesty and acknowledging that you lack some skills. At the end of the day that’s why you surround yourself with a good team of advisors, subject matter experts, and good founders.
You might find yourself in situations where you feel about lying about some facts such as milestones, future commitments, partnerships etc. Investors will figure it out easily and it’s even worse if it’s discovered post investment. Your reputation as an entrepreneur is at stake and word travels fast.
4. Negotiating and Closing Investment Deals
In the early days, investment rounds are usually quicker as investors and entrepreneurs tend to be in alignment regarding the terms of investment, usually through a convertible note. The negotiation you’d usually have would be regarding the valuation cap. Always listen to what investors have to say or offer and then request to get back to them. Real time negotiations can go sideways. You might want to involve your lawyers or advisors when reviewing the proposal.
5. Rejections are not the End of the Road
You will probably here this a lot: “You have an interesting product but at this point it’s not a good fit etc.…”. This is not the end of the road for you. Don’t stop communicating with them, keep them posted, ask for feedback, and request for a referral in their network. They might know other groups or smaller funds that could be interested. They might even invest down the road once you’ve shown more progress and growth.
Stay persistent and don’t give up easily. The fundraising process can take up to 6 – 9 months.
Stay tuned for more. The next part will deal with fundraising through debt financing.