The entrepreneurial world is littered with good business ideas that never take off because of poor planning and lack of funds. And one usually begets the other. Whether you’re looking to an angel investor to get your business off the ground or a venture capitalist to help your business reach the masses, being prepared will help you send the right message. While the amounts may vary, all investors expect a return on their investment. So, it’s important to have a business plan built on verifiable assumptions that shows how your business is going to make money before making that pitch.
Match investors to market
Finding the right investors will improve your chances of getting that cash infusion. After targeting a lot of deep pockets, Aron Susman, co-founder of TheSquareFoot, a Houston, Texas based-online platform that helps entrepreneurs and small business owners find commercial space, was ultimately able to raise $300,000 by reaching out to investors with backgrounds in commercial real estate and domain technology. “Your time is better served by talking to those who understand the market you’re trying to penetrate,” advises Susman. “The odds of closing are much higher, and time spent, much lower.”
Investors expect transparency, so trust is key. When Mitchell Weiss, now an adjunct lecturer of finance at the University of Hartford’s Barney School of Business, was seeking funding for a leveraged buyout of the commercial finance company he was running in 1996, his lead investors conducted a 50-state Lexis/Nexis search of him. “We’re as much defined as by what we do as the company we keep,” says Weiss. “Your reputation establishes you.”
Trust is key
Investors have to not only trust that you’ll watch over their money, but that you’ll make it grow. One lead investor told Weiss that before he would invest money in a person’s idea, he must first believe he could trust that person to watch his kids. How you present yourself can be an indicator of whether you’re capable of protecting their investment. “Investors don’t want some cheesy sales pitch or hard sell,” notes Wil Schroter, CEO and founder of Fundable.com, a crowd-funding platform for startups, and partner at Virtucon Ventures, from which he helped start three venture-backed and angel-invested web companies. “If you can’t explain why it’s a good idea and how it’s going to make money, the rest of the pitch doesn’t matter.”
And it’s just as important to know as much about potential investors as they know about you. “Investors want to be approached as people, not buckets of money,” says Schroter “You’re much better off pitching to an investor with whom you can find a personal connection.”
Once you make it into the room, get to the point. You should be able to sum up the problem, how your business is going to solve it, and the size of the potential market in two to three sentences. “Investors have thousands of good ideas to choose from,” notes Schroter. “If you can’t hook them in after a minute, most investors tune out.” Schroter, who has reviewed around 1,000 startups in his role at Fundable.com, sees many entrepreneurs focusing on the solution at the expense of explaining the problem. “It’s important to first identify the problem to show the market need,” says Schroter.
Once you’ve laid the foundation, investors want to know how you’re going to get customers. “Some entrepreneurs think if you build it, they will come,” cautions Susman. “You must have a plan in place and one that can be measured.” Investors will want to know your CPA, or costs per acquisition. “It’s a huge red flag if you don’t know this.” says Schroter. Investors not only want details of how you plan to use their money to acquire customers, but also expect your CPA to trend lower over time as marketing strategies are refined.
What’s different about you?
Investors are also looking for a unique selling point. “You need to show that your company can do what none of your competitors can,” points out Saad Shahzad, chief strategy officer of dinCloud, a cloud transformation company based in Los Angeles that has secured two rounds of funding in the last 18 months. DinCloud’s “competitor differentiator” is a fully automated, proprietary application tool that helps companies manage their own desktop environment. “Unlike our competitors, we’re able to scale quickly because of the intellectual property we have,” explains Shahzad.
“It doesn’t have to be a unique technology problem but could be a unique approach or sales model,” notes Shahzad, who, prior to joining dinCloud, was an associate at Norwest Venture Partners, a global investment firm based in Palo Alto, California. “More importantly, it has to be defendable.” That is, you must have the numbers to back it up. “These days, investors want sticky, recurring revenue,” says Shahzad. DinCloud’s monthly recurring revenue (MRR) model and three-year contracts with a 50-percent penalty for breaking that contract provide for a steady revenue stream.
A good track record or a smart leadership team helps
Investors also like to see prior entrepreneurial success. “Raising money is a lot easier if you have a history of making money for people” notes Susman. But if you’re a startup with no track record, one way to improve your business’ credibility is to assemble a team that fills those gaps in knowledge and experience. While TheSquareFoot is Susman’s and his co-founders’ first startup together, combined their skill sets complement each other. (Susman’s a certified public accountant, and his co-founders have backgrounds in IT and commercial mortgage and include a Columbia MBA grad with alumni contacts.) “Investors will put their money in a management team first and a great idea second,” says Shahzad. “Not the other way around.”
While they didn’t get any money on that first pitch, Susman and his team found some interested investors willing to work with them. Once they gained some traction, these investors were ready to open their checkbooks. His team also laid out a product road map with key performance indicators (KPIs), which allow for future cash infusions as milestones are reached. “We have been able to connect customers to brokers, who are willing to pay a referral fee, showing that there’s more than one revenue opportunity in this space,” explains Susman. And having multiple revenue streams shows investors you have more options to make them money.
Know your figures and your audience
Even if you’re the idea person, having a firm grasp of the financials will signal to investors there’s a capable navigator at the helm. “Many founders get caught up in the engineering or business or customer side of things,” says Shahzad. “Investors are numbers based, so knowing your numbers is critical.”
But a startup founder is not necessarily the best person to put before investors the first time around. DinCloud’s CEO brought in Shahzad for that company’s initial try at raising capital. His time at VC firm Norwest and, before that, Goldman Sachs, helped Shahzad anticipate their questions. “Investors center their return somewhere between a middle and worst-case scenario,” notes Shahzad. “It’s about understanding what could go wrong, because something will go wrong. As a company, you will be judged on your ability to ‘pivot,’ or adapt, to challenges.” Investors want to know that you’ve considered those “what ifs” and how to mitigate them.
Finally, speak to your investors’ future, not just yours
Financial projections will help you determine the amount and increments of capital you’ll need and what type of investor you should seek. VCs, which tend to invest in the millions of dollars, will expect to see more than a 20-percent return, whereas angels typically invest much smaller amounts, so they tend to expect less dramatic returns. “Angels need a base hit, whereas VCs need home runs to make their investment worthwhile,” says Schroter. But all investors expect to see at least three to four years of financials, with firm projections for the first two. “Investors want to know how your company moves from development to startup to rapid growth,” explains Weiss.
“There not only needs to be a return on capital, but also a return of that capital,” notes Weiss. “Investors will want to know the timeline for financial harvest.” And it’s important to have an exit strategy with more than one way out (e.g. an IPO or acquisition by a larger company). “You have to be realistic and balanced as you negotiate that exit,” cautions Weiss. “Recognize when you should take the money that’s on the table. Greed and avarice are not good attributes.”