The most successful companies started as nothing more than pie-in-the-sky ideas – total moonshots that their creators dreamed up in a sudden burst of inspiration and then diligently and tireless built up into something great. Visionaries from Edison to Zuckerberg have managed to change the world by tinkering away in their garages or dorm rooms with nothing more than the germ of an idea.
Well, that’s not entirely true. Even the most brilliant and dedicated entrepreneur needs something more than an idea and an unbreakable work ethic: they need resources that will afford them the time, tools, and people to grow their idea. In other words, they need money.
Startup funding looks very different from the days when Steve Jobs was trying to get Apple off the ground. Shows like Shark Tank and services like Kickstarter and Indiegogo have exposed startup investing to a wider lay audience. But for the average person, the process can still seem daunting and opaque. The terminology itself can be challenging: venture capital, angel funding, valuation – it’s enough to make your head spin. And Shark Tank, Kickstarter, and Indiegogo are – let’s face it – major long shots for the serious entrepreneur.
Thankfully, it isn’t hard to get a grasp of the basics so you can start off on the right track. When learning the essentials of startup funding – and pursuing capital for your idea – the key is to be patient. The right investors aren’t going to make snap decisions, and as an entrepreneur you should do the same. Be diligent, methodical, and thorough at every step of the process, so that when the time comes, you can be sure you’re putting your best foot forward.
Come up with a number
How much money you should be looking for will depend on a number of factors. What do you need to achieve your goals for growth? Don’t just pick a number that would be nice to have – determine exactly what you will need in order to cover the person hours and materials (which may include space, parts and supplies, storage, or equipment) necessary to achieve your immediate, most actionable goals.
Remember that investors are not philanthropists. By accepting their money, you are ultimately selling them a percentage stake in your company. While this partnership can have many implications in terms of operations and business decisions down the road, you should also be aware of what the amount of money you’re asking for implies about your company’s valuation. For example, if you’re asking an investor for $100,000 in exchange for a 10 percent stake in your company, you are effectively asserting that your company is worth $1 million in total. Be sure you’re comfortable with what investment amounts say about your company’s ultimate cash value.
Work the network
Ideally, you should start laying the groundwork for these conversations well in advance of when you’d like to actually sit down with investors. Make connections early on with other, established professionals in your field. When the time comes, these friends and mentors can help you get your foot in the door with the right people. Investors tend to be more favorably inclined toward entrepreneurs they meet through a connection they trust.
Incubators and accelerators like MassChallenge or YCombinator are also great ways to encounter potential investors – as well as excellent opportunities to refine and tweak your ideas around other, likeminded individuals. Many accelerators offer small seed funding as well, which can help tide you over until bigger investments come in.
Consider listing your company on sites like startups.co, Gust, or AngelList. These sites provide support and guidance and offer a platform that makes it easy to get your ideas in front of potential investors virtually.
Identify potential investors
What types of investors you should pitch will depend on a number of factors, such as the industry you’re working in, your ultimate goals for the company, and the size of the investment you need.
Angel investors typically make investments of a few thousand dollars and up. Venture capitalists tend to invest somewhere in the $3-5 million range, while private equity firms may be prepared to sink tens of millions of dollars into a potentially rewarding venture.
Many firms and professional investors use an overarching strategy to guide their investments. This may include a focus on a particular sector, geographic region, or type of business (e.g. B2B vs. B2C). A strategic investor is looking for more than just a financial return. These individuals and firms back businesses who are advancing solutions to known challenges and developing innovations that align with the investor’s own goals. Google and Microsoft are examples of two large corporate entities whose venture arms identify and invest in promising startups for this reason.
Individual angel investors who have a particular, vested interest in your field or industry can serve as invaluable assets above and beyond their capital resources. They may be particularly motivated to act as informal mentors or even take on a formalized role as a member of an advisory board.
When developing your list of investors to pursue, it may be helpful to find out which firms or individuals initially backed public companies in your sector. Learn as much as you can about potential investors to determine if they are a good fit for your company in terms of size, strategy, and level of involvement.
Understand the expectations
It’s crucial to understand your audience when crafting a pitch for the purpose of fundraising. Try searching for elevator pitch examples to get a sense for how others have sold their businesses. Pitching a potential investor isn’t the same as convincing a consumer to buy your product or service. In addition to showing investors that you have a solid offering that will provide value to your customers, you also need to demonstrate that you have a well-developed action plan for growth.
VCs and angel investors don’t write checks just because of what you’ve accomplished already; they get involved because of the promise of what you will achieve. Your pitch should explain as clearly and concretely as possible exactly what a capital investment of this size will allow you to do and how this will contribute to the overall growth of your venture.
The individuals and firms you’re pitching are looking for solid investments that will deliver worthwhile returns. Demonstrating your fitness and trustworthiness as an entrepreneur and partner will help convince them to back your venture.
Don’t expect an immediate answer
Once you’ve gotten to the stage of actually meeting potential investors face to face, it can be tempting to want to cut to the chase and find out immediately if all your hard work has paid off. But as mentioned above, the process takes time at every stage. Be patient with potential investors. Remember that by investing in your business, they will be taking a substantial risk. Be open and transparent with them, answering any and all questions they may have. Depending on the size of the potential investment, investors will need to conduct substantial amounts of due diligence before coming to a decision.
These tips represent a few of the most critical things you’ll need to consider when searching for startup funding. But there’s no replacement for personalized advice and guidance – from learning new sales techniques that could help you close the deal to discovering the inside scoop on some of the most important VCs. Check out Ace-up’s business coaches and get assistance with your pitch from a seasoned pro.