Do you have a great idea for a product? Does it solve an important problem for a large number of people? Are you passionate about solving this problem? Do you have a great founding team that is perfectly suited to get the job done? Great! But there is a problem. You don’t have the money and additional resources to get it done. You need investors. This is the case for many startups.
Getting investors is not easy. It is new to most founders and as such, many struggle with it. Founders also tend to have a habit of undercapitalising their businesses ie they don’t have enough money within their business, and they also tend to leave the task of raising money to the last minute. When they only have x amount of runway left, they can start to panic and get a bit desperate. This is when they accept unfavourable terms. You don’t want to be in this situation.
Here are 10 ways you can find the right investors for your startup
1. Assemble the best founding team
Besides the idea/ solution, the problem, the total available market, competitive landscape etc one of the major variables that investors consider when making an investment decision is the founding team. They want to know that the founding team has deep expertise in the proposed solution but also an intimate understanding of the customers’ problem. “No market need” is the top reason for startup failure according to CB Insights: Top 20 reasons why startups fail as stated by 42% of failed startups. Investors want the founding team to have complementary and supplementary skills required to make that business a success. This means not just the technical expertise to design and develop the product but also the business expertise to make it a commercial success. Investors know the ideas are only as good as the team that executes them. Search your network and assemble the best founding team you can. Teams with two or more founders also have a higher probability of success according to the Startup Genome Report.
2. Bootstrap to start
I believe that if the founder(s) think they have a good idea that they should back themselves and bootstrap the startup to begin with. Put their own skin in the game and take the startup as far as you can before seeking external capital. This means they can’t just quit their day jobs one day and start up the next. They will need to plan and save for it. Start the startup as a side project whilst keeping their day jobs. Save up to six months’ worth of living expenses to give yourself a buffer. Have some money saved up to capitalise the business and put it in a separate bank account. You will need this money for product development and establishment costs. Startup lean and focus on creating customer and business value.
3. Plan your cap table
Before you start raising external capital, I believe you should plan your cap (capitalization) table with what sort of equity stake and capital you and your other founders want to end up with in your business. Know what you want from your investors. Each time you get external capital you will dilute your equity stake so find a happy balance and forecast several different (eg. best, worst, ideal) scenarios. A good corporate finance advisor or accountant can help you with this.
4 Find good advisors
It is important to get good advisors, people who have a deep domain expertise in capital raising. You will most likely be new to this so find a trusted finance and legal team that know the process and the players, have your best interest at heart and can haggle on your behalf.
5 Tailor your pitch deck
As your business develops so will your pitch deck. Know what your prospective investors want to know (eg. problem you are solving, why you are keen to solve it, why you have the right team for the job, your solution/ product, the total available market, your business model, marketing strategy, your ask etc). You might not have all the answers. I believe it is best to state your assumptions and take a more conservative approach. I think it is better to under promise and over deliver rather than over promise and under deliver.
6 Speak to as many investors as possible
Investors come in all shapes and sizes. They can come in the form of FFF (family, friends & fools), angels, pre-seed, seed, generators, incubators, accelerators, venture capitalist, competitor, supplier, private equity etc. They all have a slightly different “take” on investing. Speak to as many different types of investors to see which one(s) will suit your business now and for the term of the investment.
7 Do your homework
Make sure you do your “homework” before you meet with them. This goes for fixing up your website, preparing a pitch deck, probably practicing it at various pitch nights you have in your city, being clear about your value proposition and your ask. Before you reach out to a professional investor make sure you review their website and see if they would be a good fit. See what stage they prefer to invest in, what their investment philosophy might be, what sectors or niches they prefer to invest in and maybe even speak to founders they have in their portfolio. Time is your most precious resource use it wisely – don’t waste your or the potential investors time. Go to the meeting prepared.
8 Find your champion(s)
Share your connection to the problem and why you are passionate about solving it. The right investor(s) who resonate with your passion and idea/ product will want to take it further. Tell them your story and show them why your team is best positioned to solve the problem. You want your investors to champion your startup within their firm and later in the marketplace because they believe what you believe.
9 Choose the right deal
Choosing the right deal is not as easy as the investor who is willing to give you the most money or the highest valuation. The right deal is more than that. It is about being clear and knowing what you and your business want from your investor now and for the term of their investment. Make sure it is a win/ win deal otherwise it will be lose/ lose.
10 Learn from other founders
Raising capital is often a brand-new experience for many founders and there is nothing like learning from those who have been before you. Learn from other founders about the do’s and don’t of capital raising. You might even be able to find a founder who has been down the capital raising path to mentor or advise you.
There will be a mixture of early and late stage investors coming along to the 2019 B2B Rocks conference, Sydney on June 6th & 7th. Why not attend and catch up in a more informal setting whilst getting the lowdown from some of Australia’s best known startups and investors?