You’ve got a brilliant idea for a new business. A clear path to revenue and your risks are manageable. You simply need the financial runway to start.
In the news you’ve read reports of investments into businesses you’ve never heard of. The figures are usually quite impressive (which is why they were reported in the first place), and indicators suggest that a significant amount of capital is available for investment and waiting to be deployed.
Your friends and family are supportive. You have trusted business partners who are ready to make the leap with you and good people and good ideas are a formula for success. Right?
Yes. Yes. And yes. But that doesn’t mean that raising capital for your first start up will be easy.
Understanding investors’ motivations, internal processes and goals are essential to successfully raising capital. Also, it is important to understand why some companies are funded while others are not. Comparing your opportunity to other funded companies is rarely comparing “apples to apples” and while insights can be helpful, drawing incorrect assumptions can negatively impact morale unnecessarily.
Let’s stay positive and start with the most important information first: How Investors Think.
For the purposes of this article, we won’t be discussing investors who are categorized as friends and family. The reason for this is that friends and family will support you because they care about you. They will assume that you are honest, hardworking and that you will be successful. None of this applies to a sophisticated investor; it will be up to you to convince professional investors that all of the above is accurate.
Please also note: the terms “professional” and “sophisticated” are interchangeable when labelling investors. The titles are simply meant to imply that an investor is experienced, adept at business analytics and is process driven. Repeatable processes create predictability and investors want to repeat successes and never fail twice the same way.
Let’s begin. If there is one message that you take away from this article let it be the following:
Investors want to know how much money they will make, how quickly, and at what risk.
Your role is to focus on these three questions when pitching profit-driven investors. Everything else is secondary.
The first two questions are easily addressed by your busines model’s financial forecasts. Where inexperienced companies err on these topics is that they focus on presenting the financial success of the company and fail to translate the value being created for the investor.
You need to be clear. For example: Investors need to know that if they invest $100,000 now they will receive $250,000 back in 24 months.
This, my friends, is called the “hook”.
Once the hook is set, the real work begins.
You need give the investor confidence that this investment opportunity is within their risk tolerance profile. Investors believe that the following items reduce their risk, and as a result make your proposal more attractive:
Convincing investors that they should trust you with their money is not easy for anyone. When you read about successful investment rounds in the news, it’s worth digging to better understand why they were successful. Don’t assume that other companies faced the same challenges as your start up especially when they may have had several of the issues above working in their favour.
Furthermore, set the hook deep by focusing on the “what’s in it for the investor” before focusing on what you do and what makes your company special. Investors will pay far more attention to an opportunity to make money than simply learning about a new business.
Finally, focus on de-risking your company in the eyes of investors. Recognize that there are thousands of other companies competing for investment dollars right now; investors will invest in you because you will make them a predictable return in a predictable time frame at a predictable risk level.