It's a scenario that viewers see every week on the popular reality TV show, "Shark Tank." Aspiring entrepreneurs pitch their company or product to a panel of tough-minded investors that include billionaire mogul/Dallas Mavericks owner Mark Cuban and real estate magnate Barbara Corcoran. Offering a percentage stake of their business at a certain valuation, entrepreneurs will often encounter resistance from the "sharks" who may either not be interested in their startup or want a higher equity in the business to justify their investment.
Although the show's fans might consider the entrepreneur/investor dynamic to be exaggerated and full of histrionics created to appeal to a TV audience, the truth is that it's not that far from the reality. Yet there is one glaring difference. Where the show's investors tend to gravitate toward companies that have proven profit potential as demonstrated by six- or seven-figure sales, very often in the real world that isn't the case. Sometimes, an idea is all it takes to catch an investor's interest.
John Frankel, a founding partner at the New York City-based venture firm ff Venture Capital, has funded many startups and early-stage firms and says it's a fallacy to think that investors will only back companies generating healthy revenue streams. In fact, he says, small business owners should approach investors early on.
"We believe you should talk to investors early to get a sense of what they're looking for," he maintains. To illustrate his point, Frankel cites the $80 million in venture funding that was recently raised by Quora, a five-year-old question-and-answer website that he says, "still doesn't have a revenue model." (Translation: It has yet to generate revenue or even create a plan on how to do so).
Find investors who have an interest in your industry
Just as you would investigate a company thoroughly before a job interview, you should also learn all you need to know about a potential investor and their history before you even consider phoning him or her.
“Do your homework. Don't waste your time or theirs on meeting someone not interested in you,” advises Panu Keski-Pukkila, CEO and co-founder of Caktus, a startup that provides “optimal hydration” solutions for health-conscious consumers. Recently, Caktus received $200,000 in seed funding where the lead investor was European venture firm Kima Ventures.
Frankel strongly agrees. “If you're trying to approach an investor, find out everything about them,” he urges. “What do they like? What interests them?”
Ask trusted colleagues and friends for names of investors you should approach. Solicit feedback from industry peers who are familiar with these investors.
“This works so much better than cold-calling,” says Keski-Pukkila. “If someone is ready to give you an introduction, the investors will be willing to find that 10 to 20 minutes to review your deck [from your PowerPoint presentation] or executive summary.”
Because Keski-Pukkila's company Caktus was part of an accelerator program, which offers resources and advice that help small businesses grow, he says they were constantly being introduced to potential investors as well as being mentored by them.
In addition to asking people you know for referrals, Keski-Pukkila also recommends having a presence on AngelList, a website that helps startups raise funding from accredited investors (defined in the U.S. as having a net worth of at least $1 million or an income of at least $200,000 for the last two years).
“Investors will contact you if they like what you do,” he says. “That's how our lead investor got into touch with us.”
Whether it's overstating your company's revenue projections or obscuring a detail concerning your product, never mislead potential investors when meeting with them. Chances are more than probable that your deception will be discovered, which will be the end of your ever securing funding from these backers. Many of them are shrewd and savvy and will ask for evidence to support your claims. Avoid the temptation to lie to impress. You will only hurt yourself in the end.
Keski-Pukkila echoes this sentiment, qualifying it with a warning.
“[Investors] will call your bluff, sooner or later,” he cautions. “The word will spread in the investor circles and you won't get any further meetings.”
Adjust your pitch to your audience
In general, your pitch should contain the basics: brief company history and overview that explains why you are keen about this product or business, market projections, and exit opportunities for investors (how the investor will recoup their investments). However, depending on the audience, you might want to tailor your pitch based on what you think will resonate with them.
For instance, if your company is a tech startup and you're meeting with investors that have a history of backing these types of firms, then you'll want to play up the tech components of your company. However, if you're meeting with early-stage investors that are far more eclectic in their investments, you may do a general pitch that either de-emphasizes the technology or puts it on an equal footing with the other elements you're covering.
Although he admits it's an ongoing challenge, Ben Hertzog, president and CEO of Procyrion, a Houston-based medical device startup that recently raised $2.9 million, finds this best practice to be an imperative for all entrepreneurs who are serious about getting outside backing.
“Do your best to tweak your pitch to the audience,” he counsels. “But don’t get caught in the endless cycle of reactionary edits. Just because a potential investor on Monday told you that your presentation was too technical, doesn¹t mean that the potential investor on Tuesday will agree."
Pay attention to feedback or lack thereof
If an investor thinks you're not ready to raise funding for your company, then you will need to respect that. Don't overstay your welcome. Thank him or her for their time and leave. You will not help your case if you press on, notes Frankel.
“Sometimes investors might say this is not a good fit for them and [the entrepreneurs will] carry on and be like a broken record,” he adds.
If investors offer you constructive criticism, listen to them. Use the takeaways as invaluable lessons learned the next time you meet with investors.
However, if they do like you, make sure you remain on their radar, exhorts Keski-Pukkila.
“If you like a potential investor and get useful feedback, ask him to join as an advisor,” he says. “That way he is more committed to your startup, but does not have to invest money yet.”
Approaching an investor can be an exciting and heady proposition for a small business owner. Do your due diligence and always be honest in your meetings. And who knows, you might end up securing a considerable amount of funding.