When you’re raising capital, you may feel that you should accept any money that comes your way. Like any relationship, the wrong one can pull you in the wrong direction, whereas the right one will take you where you need to go faster, and more efficiently as part of a winning team.
Investors are a lot of things, and if money is all you want from them, then try the bank. Investors are more than money. If you want your business to really succeed and make it to that next step, you need to be strategic about whom you select to have invest in your enterprise. A lot of startups grab the first guy who offers to invest in their businesses without considering a number of reasons why they should pick one over the other.
Rarely will an investor put money into a business without considerable due diligence, so why shouldn’t you hold them to the same scrutiny? The bottom line in selecting an investor is to take your time and make the right move for your startup and for you. After all, an investor can make or break your fledgeling startup, so pick the right one for your unique needs!
Fundraising: YES or NO?
There are two key reasons to go out and raise startup equity. Either you really need it to get to the next step, or the money is currently available at good terms and you want to capitalize in order to gain a strategic advantage. Fundraising is not a measure of success for your startup. It is a tool that you use to build a company that customers love. It should result in growth, profitability, return on capital and eventually, shareholders value. Funding is just a means, not a goal.
Finally, before diving into finding investors, ask yourself some critical questions:
- Why are you raising money now? Are there good market conditions, or do you need the capital as you are nearing the end of your runway?
- How will your company be perceived by investors in its current stage?
- Do you have a compelling story to tell investors?
- Can your business continue to thrive throughout the fundraising period and while there’s diminished focus from your side?
- Do you have the right fundraising materials?
Understand the different investment options you have
- Private equity (PE)
PE covers a number of investment types that are usually made by private individuals or privately-owned institutions to purchase a company, fund a project or make a private investment.
- Venture capital (VC)
VC investments are managed differently and usually designed to fund startup companies with the potential for high growth. VCs also provide startups business-planning expertise and assistance.
- Angel investing
Angel investors are high net worth individuals who seek high returns through private investments in startup companies. They provide similar startup financing as venture capitalists in smaller amounts.
How do you choose between seed investors vs. angel investors and venture capitalists? If you need a small amount of money to get going, you’re looking for seed money. A seed investor invests tiny sums into a company during its earliest days, hoping to grab a percentage of the company’s equity before it explodes. If you need a larger investment, you’re looking for angel investment. Angel investors are typically retired businesspeople who keep an eye out for investment opportunities. Substantially higher investments tend to come only from venture capitalists.
Know what you want investors to provide for you
How involved do you want your investors to be? When meeting with potential financial partners, you’ll want to ask questions about their most recent investments—what they typically provide to companies, and their expectation of CEOs and how involved they like to be. All of these questions can help determine whether the partnership will be the best one. Other factors include their area of focus, the stage of development they invest in and their reputation.
Perfect your pitch to find the right match
Take time to think about what you want to say. How will you share your mission and attract someone who shares your vision? Start with a great pitch deck. The pitch deck is arguably the most important document you will generate in the life of your company. It is ‘the hook’ by which you will capture the attention and imagination of an investor.
Discuss how your product or service will solve a problem. Be sure to include realistic financials and market research to back up your predictions, particularly how you will generate profit and how that will flow into your investor’s pockets.
Is my company interested in this investor?
Throughout the process of raising your funds, you will naturally find out which investor matches best with your company. But some criteria can be really important right from the start. Be careful here. When looking at this long list of investors, it might seem that you have an enormous amount of choice. By the end of this process, this can look totally different. Additionally, if you want to convince your dream investor, it will definitely be easier with another offer in your back pocket.
Give investors a reason to reach out to you
As much as your company wants to find great investors, investors also want to find great companies—meaning the courtship goes both ways. So, make sure you spend some time putting yourself out there. Even if your product isn’t live, you can still generate attention for your team and your mission via thought leadership.
Now, even with the best fundraising tactics, be prepared to get turned down by investors or not hear back. Don’t let that get to you. If you don’t hear back in a week, send a quick follow up in a professional manner. After that, continue following up if and when you have news to share (e.g. a product launch, key metric that you hit, commitment from a notable investor).