How and when to approach investors?
A funding plan should be integral part of your financial planning process right from the beginning. Its purpose is to minimise potential disruptions due to lack of money and ensure stable operations until your business is able to generate positive cash flow.
In the funding plan you need to detail:
- The major milestones in your company’s development
- When and how much money you’ll need to achieve each milestone
- How the money will be spent
- Potential sources of funding for each milestone.
Having a funding plan in place will send a positive signal to potential investors, banks or government agencies, telling them that you are in control and give them confidence that you will achieve the goals set out in your business plan.
Especially when it comes to raising private investment, preparation is everything. Below we discuss the main differences between angel and venture capital, and the major steps you should take to prepare your company for approaching and attracting private investors.
DIFFERENCES BETWEEN ANGEL AND VENTURE CAPITAL
What is angel capital?
Angel capital is provided by wealthy individuals who enjoy taking risks and discovering new businesses. It’s usually the earliest investment made in a startup. Many angel investors are successful entrepreneurs who also provide mentorship, business advice and contacts.
They are more interested in the founder’s character and the overall vision than the company’s current revenue and profitability. Angel investments usually range from £10,000 to £1,000,000 and the investors typically hope for a return of 10x their investment.
What is venture capital?
Venture capital is provided by professional investment firms who pool the funds from both individual and institutional investors. These firms can carry up to £500 million in disposable investment money and invest only in fast-growing businesses with proven success, for they have a responsibility towards their backers.
Their investments range from £1 million to £100 million and they normally demand a place on the Board of directors or complete control over the company’s future. Venture capital firms typically look for businesses with low starting valuations that can be scaled quickly and sold at a significant profit.
Although both angel investors and venture capital firms invest in promising startups, there are considerable differences between these two types of investors. They are summarised in the table below.
|Angel Capital||Venture Capital|
|Investors||High net worth individuals||Professional firms who pool funds from individual and institutional investors|
|Startup stage||Pre-revenue (Seed)||Pre-profitability (Series A, B,..)|
|Risk level||Prepared to take higher risks because they invest their personal money||Take calculated risks because they have a responsibility towards the investors whose money they invest|
|Investment size||£10,000 - £1 million||£1 million - £100 million|
|Investment type||Equity, convertible debt and SAFE (simple agreement for future equity)||Equity and convertible debt|
|Investment opportunity assessment||Assess product market fit, founders’ background, motivation, determination, commitment, etc.||They assess startups’ revenue growth rate, average revenue per user, customer lifetime value, cost to acquire a customer, etc.|
|Investment decision time||Relatively short. They either make the decision alone or consult their husband/wife||Takes longer because due diligence and meetings where they discuss investment opportunities take time|
|Rate of return||High potential return, 10x their investment or more||Lower potential return, 2-3x their investment|
|Involvement||Provide mentoring and advice||Demand a place on the Board of directors and active role in strategic decision making|
|Motivation for investment||Enjoy taking risks and hope to discover the next “big thing”, believe in someone’s vision and want to support it, high return on investment||Return on investment|
HOW TO APPROACH INVESTORS?
It’s true that there are more entrepreneurs than investors but surprisingly, very often we hear from investors that they can’t find good opportunities to invest in. A big part of the problem is that many entrepreneurs either don’t approach the right type of investors, or approach them in the wrong way or at the wrong time missing the opportunity to get funding for their projects.
As we said at the beginning, when it comes to raising private investment, preparation is everything. The goal of this guide is to teach you, step by step, how to identify the right investors for your business, how to approach them and how to prepare your startup for funding.
STEP 1: Define your company and the space in which it operates
Define the niche within your industry where your product sits in terms of value offered to customers. Then, think if there are any other market segment or industries where you could offer your product with no or little adjustment.
Be as specific as possible because you’ll need this information later on to estimate the total addressable market and make a list of potential investors who invest in your industry or market segment.
STEP 2: Define your typical investor
Create a typical investor’s profile by answering the questions below:
Investor type: (Angel investors for investments of less than £1 million; venture capital firms if you´re raising more than £1 million)?
Location: (Many investors prefer to invest locally or at least in their country of residence, especially if they are expected to get involved in company management.)
Current job: (consultant, entrepreneur, doctor, lawyer, board director, etc.)
Past experience: (industry specific experience, entrepreneurial experience, experience managing a rapid expansion at another company, etc.)
Industries they invest in: (Try to be as specific as possible.)
Risk tolerance and expected return: (Those with higher risk tolerance usually expect higher return.)
What they offer: (money, mentorship, access to distribution channels, etc.)
Their selection criteria: (experienced team, good traction, innovative products, etc.)
What level of control they expect: (Almost all venture capital firms request a place on the Board.)
STEP 3: Create a list of potential investors
Based on the investor´s profile, create a list of angel investors or venture capital firms you want to target. Aim to have at least 50 – 100 potential investors on your list. You can rank them by different criteria but, although it can be tempting, don’t focus too much on attracting 2-3 the most desirable investors while ignoring the rest of the list.
Most investors are very specific about the industries they invest in, deal size and company stage. Bear that in mind and don’t waste your time on those who don’t match your investor`s profile. The worst thing you can do is target anyone and everyone.
Apart from the investor networks, you can look for information about recent investment deals to find out who invests in your industry and the usual deal size. Many investors speak at startup conferences so conference agendas can be another source of investor information.
STEP 4: Look for referrals
Many investors consider only the investment opportunities that come through people they know and trust. To find referrals, research each investor from your list. Look for mutual LinkedIn connections, their conversations in social media, companies they invested in or worked for in the past, conferences they usually attend, causes they support, etc.
Then, create a path to each investor. The paths can include people, events, companies, associations or anything else that could lead to your target investors. Once you have the paths defined, reach out to your network and start making connections with people who could potentially introduce you to the investors.
This should be an ongoing task, and although very time-consuming, it`s a must if you want to raise private capital. And, not all referrals are the same. If you discover a few connections in common with you target investor, always try to make an introduction through the strongest one. It may mean more initial work, but the results will be better.
STEP 5: Prepare a memorable elevator pitch
When you meet the potential investors for the first time, don’t overwhelm them with details about your company and don´t ask for money. Your goal should be just to spark their interest, and for that, you need a unique elevator pitch of 30 – 60 seconds explaining who you are and what you do.
Carefully craft your pitch and make sure to include a piece of information that will instantly capture their attention. That can be a unique solution to a common problem in daily life, strategic partnership with a well-known company or individual, your growth rates or user numbers, an award, an article about your company in a national newspaper, someone they know, etc. If you can’t think of anything, it’s a sign that you’re not ready to raise funds from private investors.
Always close your elevator pitch with a question to engage them in a conversation about your business and hopefully get their business card and a request for more information.
If you’re introducing your company by email, write a short cover message, mention where you met or your referral’s name and attach you pitch deck. When writing the cover message, follow the same rules as for the elevator pitch but instead of closing with a question, close your email with a call to action. For example: “I would be glad to give you a call and answer any questions you may have. Are you free on Wednesday morning? If not, please let me know what time would be more convenient for you.”
When you approach potential investors, either by email or in person, be personal. Don’t let them feel that you`ve delivered the same pitch or sent the same email to dozens of other investors. During your conversation, or in the email message, make sure to mention some of the information you collected about them such as their past work experience, education, a company in their investment portfolio, interests, hobbies, etc. It will automatically add more credibility to your speech or email and make them remember you.
STEP 6: Business plan and pitch deck
Before you start approaching investors, you should have a pitch deck and business plan ready. The investors will surely want to see them at some point. Your business plan should include detailed market analysis, financial projections, and some kind of proof-of-concept.
If you don´t know how to write a business plan and pitch deck, see our free Business plan template and Business plan writing guide, and Pitch deck template and Pitch deck writing guide, or contact our team for assistance at firstname.lastname@example.org.
STEP 7: Invest time in networking
Networking is vital for the overall success of startups and small businesses. Think of it as another form of investment in your company. There are many networking opportunities but be selective and invest time only in those that can help you achieve your goals.
Create a monthly or quarterly plan and know when, where and why you´re going to an event. You can also create social media accounts for your business and join online conversations related to your industry to raise brand awareness.
Raising funds without a strong network is close to impossible, so start networking as early as possible. By regularly attending business events in your industry, people will begin to recognise you but that´s not enough to establish quality connections. Think about how you can provide value to the community and make them want to stay in contact with you.
Networking is not only about meeting your target investors. It’s about exchanging ideas, benchmarking, expanding knowledge, getting a fresh perspective, etc. It’s very likely that you’ll meet someone who`s already been where you are today and willing to share their story. You could learn a lot from their experience and avoid making the same mistakes.
And, you won’t be networking only with people attending the events. No matter who you speak to, always try to make a good impression because they may know someone who would be interested in your business.
If you’re not sure how to build a network, start by joining your local incubator, chamber of commerce or university networks.
WHEN TO APPROACH INVESTORS?
The best time to approach investors is as early as possible, and definitely before you need an investment. Don’t wait until you have a perfect product or run out of money and become desperate. Start networking as soon as you have a basic concept and something to show or discuss, without disclosing the important details about your products.
That will give the investors time to get to know you and you’ll get to know them. Raising funds is often about trust and sharing the same vision. Most investors prefer to give money to entrepreneurs they know and who have similar ideas about running a business.
By connecting with your target investors early on, you’ll also receive valuable feedback and allow them to witness your progress. In case of a sudden growth opportunity, they’ll be there to support you and help you take advantage of it.
Never ask for money when you meet an investor for the first time. Instead, introduce your business and ask for advice or their opinion about the current industry trends. Get them into a conversation and try to come across as a good listener, and not someone who’s trying to sell their ideas.
COMMON MISTAKES TO AVOID
Many good business ideas don’t receive funding because of these common mistakes. Make sure to avoid them or you risk being ignored by the investors.
Asking for money before proof-of-concept
To raise private investment, a great business idea is not enough. You must show that your idea works. That could be in form of a working prototype, customer orders, letters of intent, growing traffic to the website, customer acquisition metrics, etc.
The investors want to know that the product testing has been successfully completed, that there’s a large market and a proven team ready to execute their plans. If any of these is still missing, you’re not ready for raising funds from professional investors. In case product development is expensive in your industry, you can try contacting local or international incubators, who offer help with developing product prototypes.
Randomly contacting investors
Many inexperienced entrepreneurs wrongly believe that raising funds is a numbers game, and they try to contact as many investors as possible, hoping that eventually they will find someone willing to invest in their business. Most of those emails and calls don´t result in any response at all.
Many entrepreneurs also fail to research the investors and often contact people who don’t even invest in their industry. Researching and targeting a smaller number of selected investors is more likely to get you an investment.
Overwhelming investors with information
The investors are usually very busy people who don’t have time for reading a 40 page business plan just to decide if the opportunity is of interest to them or not. If you send one, they’ll probably put it aside and forget about it, or quickly skim-read it and likely miss some important details.
A 10 – 15 slide pitch deck that gives a quick overview of your business will be much more effective. Do have a business plan ready but don’t send it before they request it. Some investors prefer to do their own market research and financial projections before they even look at your business plan.
Outdated and unattractive website and social media accounts
After receiving your pitch deck or business card, the investors will most probably Google your company and your team. Unattractive website and outdated social media profiles (Facebook, Twitter, LinkedIn, etc.) will make a very bad impression and they may decide not to fund your business.
It can make them think that you are lazy and not serious enough about building a successful company. So, make sure to keep all online profiles up-to-date and have a professional website before you start connecting with the target investors.