For Startups, it is not an easy task to attract investors no matter whether it’s a venture capitalist or angel investor. Roping in an investor is the biggest challenge an entrepreneur may face while raising money for the first time. According to venture capitalist Jim Casparie, investors look for ‘ideas that change the world.’ It requires a lot of time and patience to have solid leads for investors. It needs preparation, planning, strategy and proper research to be able to attract investors. It is important not to go behind ‘popular kids’ just because of its attractiveness. It is important to match the startup with the right investor. Below are discussed few things that would help any startup entrepreneur to attract the right investor.
1.Networking is the King:
An entrepreneur can never meet enough people. It is important for an upcoming entrepreneur to attend all possible business events, conferences or mixers. It is important to keep the eyes open for any potential investor. If sharp enough, one can get a large investor while looking for a smaller one. Specialized networks are very useful too. The consists of aforementioned AngelList that include thousands of individual investors.
Apart from social media sites like Twitter, Facebook, LinkedIn and AngelList , attending conferences is a great place to network with industry experts, other business owners and potential investors. Generally, investors attend such conferences to keep themselves updated on the upcoming new technologies and entrepreneurs. Conferences are great place to develop relationships with loads of investors. References and introductions are another great way to get connected with others who can help entrepreneurs. Making investment is not an easy deal for the investor, so it is advisable for any entrepreneur to walk a mile in the investors shoes to understand the investor’s perspective better.
It is common among many entrepreneurs to think that their business idea is the best in the market. It is not something wrong but they get carried off too much by it. So it is vital to do full research on the own concept and find out whether it has worked or failed in the past. No matter whether it is a service business, manufacturer, retailer or any type of business, it is a must to know about the industry inside out. Entrepreneurs should do a complete industry analysis knowing about the industry participants, distribution patterns and competition and buying patterns.
Market research can help the entrepreneur to be prepared and understand the changing market conditions which would also help the investors in making their decision. An entrepreneur who know his market well would be seen as a person who knows what he is doing and it is exactly what an investor would want to know. So entrepreneurs – do your homework!
3.Avoid Hockey Sticks:
Around 90% of the business plans show dramatic initial revenue growth that’s off-the-charts which is referred as hockey stick. It is mostly used when things like users, page views or revenue starts growing at a normal linear pace and then, once an inflection point is hit, growth takes off at an exponential rate. But the fact is that it is not common and does not happen in 99% of the companies. It is often seen that entrepreneurs are obligated to include a hockey-stick growth curve in their pitch deck to potential investors regardless of the actual traction or revenue growth, considering the fact that investors want to see momentum.
Posing about something that is not realistic and then fighting the way to exceed them would not be something any potential investor would be impressed about. The unrealistic numbers would only pose the entrepreneur’s not clear understanding of the business and the market. An investors once said, “I would rather see a smaller number built on a foundation of assumptions that have been verified than a large number that you have pulled out of thin air.”
4.Clear Business Plan:
It is very important to prepare a thoughtful, well-researched business plan. Just making statements of how successful the idea will be will not be enough. The statements have to be backed with proof in the form of case studies and research studies. If able to afford one can hire a business consultant to help you draw up the business plan. A convincing and thorough business plan is key to attracting investors. A convincing business plan has to be checked if its profitable, a repeatable, expandable, predictable and defensible model. Many entrepreneurs fail as they are not sure how to do this with a ‘real world’ view.
The entrepreneur should be able to answer any question about his business when asked by an investor. The question can be on the financials of the company, or the value proposition without looking for answers on a paper. The investors would want the business for entrepreneur to be like a kid for a mother who would know about the kid inside out. He should also be able to answer to the question, ” what makes your business different?”
Business valuation is never straightforward for any business venture. For startups with little or no revenue or profits and less-than-certain futures, the task of valuing is quite tricky. Valuation of a pre-revenue company is often one of the first points of contention that must be negotiated between angels and entrepreneurs. Entrepreneurs tries to make the valuation as high as possible while the investors want to value as low possible so that they can own a reasonable portion of the company for the amount they invest.
There are many methods to calculate the valuation of the startup that includes venture capital method, Berkus method etc., It is advisable not to stop with one approach. Top investors would want to use many methods to value a startup as no single method is useful every time. Multiple methods also help in the negotiation process because an average can be determined from among them. An entrepreneur should be able to answer the questions asked by the investor – why is your company worth what you say it is worth? Are there comparable valuations of recently funded companies? So it is very important not to hike the company valuation. If done, investors can see it right through that.
6.Choosing the right investor:
It is often mistaken that entrepreneurs looking for investors cannot be choosy as they need money and it is not right to turn down someone who has it. Angel investor David Cohen, co-founder of the Boulde, startup accelerator TechStars says, “As an investor, I want you to be selective about everyone including vendors, customers. If I’m not adding value to what you are doing, don’t talk to me.” It is like living with a bad relationship every day if the investor does not have same interest or is out of sync with what you are trying to build. Like other close relationships, the personalities and the interest have to match and there needs to be a deep level of understanding, otherwise it will never work.
From venture capitalist to angel investors, each have their own investing strategy and habits. For instance, they may only invest in certain stages of startups or specific industries, geographic locations etc., So the entrepreneur can work to get that intel before wasting time. Speaking to many portfolio companies particularly those that did not have many success will help understanding better. It is important to find the right investor with the matching interest, ready to help and advise the business properly.
7.Stay Away from Funding Consultants:
Funding consultants are the ones who have good connections among the VCs and will help an entrepreneur to score some meetings and teach him on the pitch. Some of them may indeed serve the purpose but not all. Most of the fee-based consultant would not be capable enough to add value to a startup.
Most of the consultants see the startups entrepreneurs as an opportunity and they want a large retainer, an equity stake in the company or both. They claim to open up doors for a fee. Fake advisers and mentors attach equity and monetary terms to mentoring. It is important to check their credentials before trusting on them. So if someone decides to use him, it is very important to verify if he is credible and really worth it. There are many mentoring forums out there who are ready to help for free.
Team members play another major role in attracting the investors. “Given the high degree of uncertainty associated with early-stage investing, venture capitalist bet on the jockey over the horse because they need to have a high level of conviction that the team has the necessary skills, domain expertise and diversity to evolve just as quickly as the industry does,” said Ryan Feit, CEO and co-founder of SeedInvest, an equity-based crowdfunding platform. No matter whether the team is made of experienced entrepreneur or recent college graduates as long as the team members have complementary skills with a good record of collaborating well, it should be able to attract potential investors for funding.
Also, most of the entrepreneurs believe that they should form board of directors until they have raised a significant amount of fund. But the true fact is that good guidance always provs valuable at any stage of startup. Also, the presence of a board may also signal to potential investors the willingness of an entrepreneur to hear and take advice from other in the business.
9.Diversification of Offerings:
Diversifying the startup offerings serves as a means to add more value to the services. This may not suit everyone but it widening the products and services can make the business more attractive to the investors. Having more than one product means the company has a more than one option to generate revenue. This would also reduce the risk factor for the investors. It is most common in these days for people to lose interest in one product and to move on to other. So deal with more than one product will serve as backup plan and show investors that the company can pivot with the industry trends.
Not all business use recent updated technology. Most of the small-scale business use outdated technology that drastically reduces efficiency and productivity. It is important for any startup to have the latest telecommunication systems, computers software and applications. Chuck spreadsheets to track time and manage projects with a project management tool like ProWorkFlow. This may cost a bit but the goal is increased efficiency and productivity in a longer run. This shows the efficiency of the company and thereby attract investors for the business.