Part Three. When Pitching to Investors.
How does one meet and spark investor interest? Which investor should you consider? How to close the deal on good terms? Every founder is searching for answers on these questions when raising capital for their business.
Fundraising is a necessary but complex task that startups periodically endure. But startup investing is rapidly evolving - so you have more options today to fund a business than ever before. Here are some useful tips on how to close a deal with an investor.
How they decide: VCs invest other people’s money and angels invest their own - so the decision-making process is different for both. The decision-making process of an angel investor is usually much faster – they make the call on their own and there is almost always a much larger component of emotion that goes into the decision. VCs usually require more time, more meetings, and will have multiple partners involved in the final decision. The Crowd usually invests in passion so the decision-making process is mainly based on emotions.
New players: Today, there are many new VC firms “micro-VC’s”, which target early stage companies. Traditional VCs also invest in seed rounds but the majority of them focus on later stage series. On top of that, there are approximately 370,000 independent angels in the US who will invest anywhere from $25k to $100k or more in individual companies. They also form angel groups with their own due-diligence team reviewing potential investment opportunities and hosting pitch events. Angels often introduce interesting companies to their own networks so finding one angel that backs your business might be an opportunity to reach more of them and close the round.
The Crowd (non-accredited investors): Crowdfunding keeps growing astronomically and entrepreneurs keep coming up with new ways to raise money online. Initially, crowdfunding was associated with either AngelList (accredited investors) or Kickstarter (reward-based crowdfunding). Then online lending started gaining its momentum. Today, with JOBS Act Title III in power, anyone can invest in your business in either equity or debt. You can use new crowdfunding sites not only to raise up to $1M but also to build your brand equity and customer base.
Get ready to meet investors: Have a story - and not just about the product, service or company. Most investors, especially at early stage, will be investing in you - the person behind the company. They will want to know about the team, how you met, how you work together. This is about how you got to this point in your business. Investors want to know what it is about your background that brought you to them with the solution you’ve created and why they need to pay attention. They want to hear about your previous experience and what makes you the right person to invest in and help your company grow. But above all, they are looking for passion - it is the passion that drives the business.
Be straightforward: Potential investors are going to ask a lot of questions and they want you to be honest with them. As a starting company, there will be many things to figure out - it is ok not to have an answer to everything and acknowledge that you lack some skills or processes. You also might want to have a plan on how to acquire the missing skills; like hiring an expert, bringing on an advisor, or finding a partner. And you should never lie about facts - milestones, commitments, relationships, among other things. A professional investor will figure it out and word travels fast.
Negotiating and closing the deal: Early investment rounds are usually closed rapidly since investors and startups seem to be on the same page about the terms - convertible note or SAFE. Negotiation on seed stage will be focused on the valuation/cap. When negotiating with a VC or an angel, remember that they are usually more experienced at it than you are, so sometimes it is better not to try and negotiate in real-time. Instead, listen to their suggestions and say you will get back to them. Ask your advisors or legal counsel to help you review their proposal, although keep in mind that the majority of things credible VCs and angels will ask for tend to be reasonable.
Don’t burn bridges: Even if the investor decides not to invest now, don't stop the communication channel. You never know when you'll run into that investor down the line and how he/she might be interested in helping then. Stay persistent - maybe the investor prefers later stage or wants to see someone else commit first. Thank them for the time and ask for feedback on what were the ‘red flags’ and how to improve. Lastly, always remember to get back to them with updates.
Part Four would be about Debt Investment Instruments.
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