Original article posted on N2 Technology Wednesday, April 14th.
Welcome to the third and final instalment of our three-part series. We've covered how to bring your idea to life and turn it into a viable business, we've discussed getting yourself investor-ready, and now: it’s time to raise capital. It’s simple, right? You meet with an investor, close the deal and cash the cheque. After all, startups need money, and investors have it - so what else do you need to do other than convincing them your business has great potential?
Unfortunately, it’s not that straightforward. Whilst one investor might offer the funds you’re seeking, they may not have the acumen required to help you succeed. The challenge lies in finding an investor who has the funds readily available, whilst also complimenting you, how you work and your business. Much like building a sports team, your ideal investor should augment your skills, motivate you, help you stay focussed, offer support, and believe in your vision for the company. As Forbes says, “your investor choices can either destroy your dreams and turn them into nightmares, or break down numerous barriers on your flight to your full potential.”
Offering more than just interest rates and percentages, investors provide experience, knowledge and know-how. However, don’t just fixate on the immediate requirement. Every investor you associate yourself with has a continued impact on who you will attract for additional funding rounds in the future - and they are not only limited to big VC firms or angel investors. Smaller amounts of initial seed funding from friends and family are taken into account as well, so even if you’re borrowing $1,000 from a relative, make sure there is clarity on the agreement and that you aren’t setting yourself up for heartbreak later on. Our advice? Exercise some longer-term vision and choose wisely.
Read more: How To Build A Start-Up: Ideation
Step 1: Where will the funding come from?
You will need to decide on the type of investment best suited for you and your business. There are options; personal savings, friends/family, loans, crowdfunding, grants, and VC/angel investors. Each avenue has advantages and disadvantages:
Personal savings might be good to get your business off the ground as access is immediate, but it may not have the longevity needed.
Banks do not favour startups as they are deemed risky with little upside as the failure rate is high - so expect hefty interest rates to repay.
Crowdfunding usually works on a rewards-based system that gains access to cheap money and can help pre-fund future products. However, they are time-consuming due to the nature of campaigning and potentially with little payoff.
Grants are available from the government and other institutions. They don’t require repayment and come with prestige and promotion. However, they’re difficult to obtain, come with strings attached and have an uncertain future.
Venture Capital and Angel Investment offer financial support, knowledge, guidance and expertise in return for company equity, therefore, it is within both the founder’s and investor’s best interest for the company to grow and succeed. VC funding does not require repayment, helps companies scale quickly, and can connect entrepreneurs with other business leaders. However, they usually seek a fast and sizable return on investment and can come with equity penalties if the returns are not as promised.
Step 2: Figure out what you need
Map your strengths and weaknesses to figure out where you need support. Deciding what’s important in an investor or capital source from the outset often helps founders streamline the process of filtering and screening - whilst also empowering them to make decisions not solely driven by money. Do you need a bigger network? More expertise? Money? All three? Different investors fulfil different goals, so seek what you need, rather than the largest or first cheque. For example, an Angel Investor brings individual expertise but rarely has the breadth of resources a VC firm has. Remember, many investors will have a seat on your board, too - so ensure you choose partners who provide guidance and funding whilst applying the type of management you can live with. How much freedom on decision making do you need? The key is to find an investor that is not necessarily ‘easy’ on you, but one that compliments what you and your team bring to the table.
Read more: What It Means To Be Investor Ready
Step 3: Source available data and map the entire investor ecosystem
Knowledge is power, so make sure to understand your options. Use common avenues such as websites and google searches to find press releases, financial statements, annual investor reports and news to gain further insights. And most excitingly, what was once limited to location and where you lived, the virtual world has dispelled those restraints and enabled the investor ecosystem to expand without geographic barriers, so be prepared to find investors outside of your country, in a different timezone, and speaks another language. Mapping out the ecosystem is a continuous, never-ending process. Some brands have utilised the no-barriers access that the internet grants by creating platforms where collections of startups and investors can meet, greet and make incredible partnerships entirely through their devices.
Step 4: Search and filter firms by key investment criteria
With over 1000 VC firms in the US alone, refining your search will save time and avoid missed opportunities. The question is: in a world of historical data and ever-changing investor mandates, how can you ensure that you’re making objective decisions based on real-time data? Whilst you can search and filter investors using what is generally considered ‘old-investment’ data from previous deals, success rates and annual reports, it is prone t0 errors and subjectivity. If you could, wouldn’t you use live, real-time investment preferences to see what other startups in your sector are raising today?
Does location matter to you - and if so, where? Ensure the investor demonstrates an interest and ideally has worked in your industry sector before. Do they support the business model you’ve chosen? Have they invested in products at the same stage as you are - and how have they helped them develop? Have they worked with similar technologies or show interest in doing so? Do you want, and do they provide, incubation support? Will they open any viable routes to market? What’s the cheque size on offer and the deal stage? How much equity are they seeking? Will the founding teams’ personalities complement both the lead and co-investors? And remember: each investor operates in a specific funding level comfort zone, so consider your requirements and filter accordingly.
Step 5: Identify the relevant investment professionals in each firm
Delivering the perfect message to the wrong person is just as harmful as sending a terrible message. As with all selling, pitching to a non-decision maker is highly unlikely to yield results, so why waste your time conversing with someone who doesn’t have the authority to influence outcomes?
Although pitching the wrong person might feel harmless, you’re relying on them to progress your proposition throughout their organisation - but you're the best advocate for your product, so leaving the incorrect influencer to sell on your behalf can result in a low chance of success.
Pitching employees lower in an organisation feels less daunting as they're generally more affable and easier to access, but it comes at a price of missed opportunities. Try not to confuse courtesy with commitment, and do some investigation into finding the right person and be prepared to put in the work to get up the ladder and in front of the decision-maker. VC's employ entire teams to source deal flow and earmark potential winners up to the Investment Committee for review, so trying to identify the right person at the start can be a near to impossible task. One of the most common job titles for Sequoia Capital on LinkedIn is ‘investment team’ - without phoning the person, how can you decide who you should speak with?
Step 6: Reach out cold or find a mutual connection to make a warm intro
Once you’ve found the decision-maker or the key influencer, make sure your introductory outreach is on-point, memorable, and effective. To grab their attention, do some homework into who they are, how they speak and what they’re interested in. A generic, template-formulated message incites the use of the delete button. We’re often being sold to, so be creative and personable with your communication. Remember what we said in our last piece? Some VCs will receive over 250 proposals a month - which is why the industry standard response time upon receiving an application is 45 days - alternatively leave it to the matchmaking platforms to get you in-front of the right individual today.
Step 7: Book an appointment and pitch them
Be respectful of both your and your prospect's time. If you get to the stage of setting a meeting, be punctual, prepared and ensure you’ve set aside enough time in your day to be free of distractions. When it comes to pitching, this is your chance to demonstrate your value - so talk in their language, be data-centric, know your numbers without having to search for them, showcase how you intend to turn a profit and expect to be challenged. During the Q&As section, you will gain invaluable insight into the investor's intentions and interest, so listen carefully to their observations and concerns. Not only are you trying to satisfy their requirements, you will also be gauging if you want to work with them - so prepare questions of your own and know what you’re looking for beyond the money - refer to step 2.
Step 8: Don’t leave them hanging. Follow up. Repeat
Your initial presentation will soon be forgotten and lost in the crowd, so you must find a way to stay front of mind. After delivering your pitch, or agreeing to a meeting, take the initiative to define the next steps. After all, sitting around hoping for a call-back gets you nowhere, leading to wasted time, focus and energy. Progression can be stunted by protracted stagnation, so give your prospect the permission to say no and avoid elongated thinking. A common mistake is to pitch in ‘series’, meaning you wait for the outcome of one approach before securing the next. Avoid this by initiating multiple meetings simultaneously, progress conversations and pitch in parallel. That way, If one prospect doesn’t work, you can move on quickly and allow more time to find one that does. Don’t wait around for empty opportunities.
With a 90% failure rate, it’s hard to imagine why anyone would aspire to build a startup, yet millions of entrepreneurs are attempting it every year. Requiring dedication, commitment, preparation, passion and a willingness to take risks. Building a startup is not a quick - or easy - endeavour. The course for funding can be arduous battling in a competitive industry, fighting to be seen by any VC or investor - let alone the right investor and at the right time. But the ones that succeed are prospering from life-changing rewards, working for themselves, living a life on their terms and rapidly enhancing the lives of millions through innovation.
Driven by advancing technologies, matchmaking algorithms have fast-tracked the process of getting in front of the right investment professional, at the right investor, at the right time, cutting time, money, resources, levelling the playing field and allowing more time to spend on building your business and pitching relevant investors.
N2 Technology intelligently connects entrepreneurs possessing ingenious ideas with suitable, enthusiastic investors who share the same vision. Since the world was forced into a state of adaptation from a global pandemic, agility and solution providing has proved vital. There has never been a better time to break the mould - or follow the crowd consisting of 90% failing startups.