Most entrepreneurs either jump right into pitching investors or find themselves with an introduction to a potential investor without giving much thought to properly preparing for their fundraising journey. I use the term journey because that’s exactly what it is and like any quality journey or adventure it requires proper planning. To often I find that entrepreneurs jump right into pitching investors either believing that investors would be stupid not to invest in them or that it just takes one investor so they might as well start the courting process as quickly as possible.
Reality is that you generally only get one opportunity to pitch an investor, and if you don’t impress them in that initial meeting you will rarely get a second chance to pitch them again. Thus, it’s extremely important to make sure you are prepared so that a “no, I’m not interested” can turn into a “I would be interested if you are able to achieve X and Y in the next 3-4 months”. This blog post will summarize how to prepare to raise capital from outside investors.
Step 1. Basic Background Research
As Sun Tzu stated in The Art of War- “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” Assuming you “know yourself”, the first step in preparing to pitch investors is to research your investors. Most early-stage technology companies will be raising their first couple of rounds from individual accredited investors more commonly referred to as Angel Investors. Angel Investors, especially those that prefer early-stage opportunities, are a very different type of investor than real estate investors or publicly traded company investors. Thus, they have their own language and quirks that you need to understand if you are going to successfully position your investment opportunity to be attractive to them.
My suggestion is to meet with at least a dozen investors and DO NOT discuss your business. Ask them about how they source their deals, how they vet their investment opportunities- aka due diligence, what they are looking for or what makes an in an investment opportunity appealing to them, about their recent investments, about their entire portfolio, about their best or favorite investment (could be two different companies), and about their worst investment. Essentially seek advice from them about how their personal investment strategies but don’t pitch them your business, even if they ask.
Also read a book or two about Angel Investing. By understanding how Angels build their portfolio’s and the types of returns they are looking for will allow you to position your investment opportunity to match their expectations. I would suggest reading David Rose’s Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups. A basic search for “Angel Investing” in Amazon reveals hundreds of books, including Jason Calcananis’ new book which I have heard good things about.
And meet with a dozen founders that have either successfully or unsuccessfully raised a similar amount of capital for similar investors that you are targeting. Learning what did or did not work from someone that recently pitch similar investors can be extremely valuable. Especially if you are trying to understand the current investor trends for your market or geographical region- equity vs note, average valuation, etc.
Essentially take the time, 3 or 4 months, to do some basic reconnaissance on they type of investors you will be targeting. Not only will this give you valuable information on how to position your investment opportunity but you will also be building a valuable network that you can leverage for Step 2.
- Angel Resource Institute’s Halo Report– an annual and quarterly report on trends in Angel Investing based on actual funding data from Angel Networks that belong to the Angel Capital Association.
- Every Investor is Different. But. 22 Reasons I Won’t Fund You by Jason Lemkin of SaaStr
- What do I look for in a pitch? By Sarah Guo of Greylock Partners- even though its focused on pitching a Series A investment to institutional capital the principles hold true with Angel Investors.
Step 2. Build an Investor Funnel
Raising capital from outside investors is not that different from a standard sales effort. You have a product (your company) and they may or may not have a need for your product (building a portfolio of investments into early-stage private companies). Thus, as any good salesperson knows, your ability to sell a product is dependent on a couple of things- the quality of your product and more specifically it’s ability to fill your customers need(s) and the quality of your sales funnel/pipeline. The second step in preparing to raise capital is to build out an investor sales funnel.
Mark Suster from Upfront Ventures has a great blog post on building an investor funnel when approaching Venture Capitalists, but his comments are relevant to raising early-stage capital from individual investors. Especially his suggestions on how to manage the entire process and determining if an investor is truly engaged or not. I would also highly suggest using a CRM tool/platform (customer relationship management) to help manage your investor funnel or at least build one yourself in excel to track when you have met or communicated with individual investors and keep notes as to how the meetings went and any action items they requested. I have known entrepreneurs to use both Pipedrive and Foundersuite but for all of my fundraising efforts I have built my own CRM in Excel or Google Sheets.
- How Many Investors Should You Talk to in a VC Fund Raise? And How Do You Prioritize? From Both Sides of the Table
The hardest part of fundraising will be filling, and then keeping, your investor funnel full with quality leads. Unfortunately, there is no easy “hack” to address this, it will take many hours of old school in person networking in combination with a lot of internet stalking, err searching. A couple of comments I will mention include; look to local Angel Groups- the Angel Capital Association has a directory of their member organizations, research who invested in the early rounds of successful companies that offer solutions to a similar market/demographic but are not competitors- Crunchbase and CBInsights are great resources for this, tap into your personal network for introductions- LinkedIn is a great resource, attend as many entrepreneurial focused events in your local area as possible, many alumni associations have Angel networks associated with them specifically for companies founded by alumni, and many local entrepreneurial resources- like ITEN, can connect their graduates to local investors. Also keep in mind that similar to sales cold calls/emails or LinkedIn Mails have a very low chance of netting a serious investor. So, focus on targeting potential investors that you can at least get a warm introduction to. Finally since investors generally like to invest locally or within a specific market/domain, there is no need to waste your time targeting investors that have a history of only investing in other markets/domains or are not within your geographic region.
As you build your investor funnel, keep in mind that according to The American Angel Campaign, a survey conducted by the Wharton School of Business, the average individual investor makes two investments per year, 10 investments in their career, and that the average investment size is $25k. If you are seeking to raise $1M from individual angel investors you will need to identify 40 individual investors that are interested in investing in your company. And if you assume a 10% success rate, that means you need to identify and pitch 400 investors.
Side note, steps 1 and 2 can and should be run in parallel.
Step 3. Meet with Your Corporate Attorney
Before you pitch investors, it is imperative that you meet with your corporate attorney to gain a full understanding of the terms of the investment you are offering. For example, are you offering debt (convertible note, SAFE note), equity, or will it be a less traditional revenue-based financing deal? And more importantly that you understand what you will be giving up, control of your company, in exchange for the capital required to grow your business.
If you don’t have a corporate attorney find one, immediately. And make sure they have actual experience with the type and stage of fundraising effort you are about to embark upon. Keep in mind that not all fundraising efforts are the same, I have known many corporate attorneys with experience with Series A and beyond capital raises that have given their clients horrible advice regarding their $250k seed round convertible note. This is because what can be great advice for a large equity round is not always good advice for a smaller seed round. Having a corporate counsel with the right experience will ensure that you fully understand the terms you are agreeing to and more importantly the potential short and long-term effects of agreeing to those terms in exchange for their capital.
And do not use your third cousin or brother’s girlfriend because they went to a good law school and will help you out for free. If you are having trouble finding a local attorney with adequate experience look to larger startup ecosystems or find a large local firm with an office in an established startup ecosystem.
For a deeper discussion on term sheets and list of additional resources check out a previous ITEN blog post I wrote.
- Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld & Jason Mendelson of Foundry Group
- Rich vs King – entrepreneurs should choose between wealth and control by Nic Brisbourne of The Equity Kicker
- How Startup Funding Works – Infographic from adioma
- The Price of Growth: Founders’ Dilution by Mary Beth Kerrigan via Xconomy
- Why Lawyers Don’t Run Startups by Steve Blank
How to build a pitch deck and data room for your Due Diligence documents are topics for a future blog post but below are some additional comments and resources related to preparing to raise capital from “outside” investors.
- I suggest that each company have two investor pitch decks. One for the actual pitch and one for sending to prospective investors. Keep in mind that when you email someone your pitch deck you will not be there when they review it, thus you should be sending them a deck that clearly sets up and explains the take home message for each slide. Thus, your email version will have more words and less pictures than the version you use to actually pitch with since that one should be simplistic, visually appealing, and contain minimal words on each slide.
- Always send files to prospective investors as a PDF since they are the easiest files to open across operating systems. Also, clearly label your files with the company name, type of file, and date. Remove all “internal” file name notes- version number, initials of edited it last, etc. For example, Acme Co Investor Pitch Deck 180627.pdf as opposed to Investor Pitch v13 jcs edits.ppt.
- Most investors don’t have Keynote or Prezi, so there is value in creating all of your investor pitch decks in PowerPoint. Otherwise you will have to convert them to PDF and will lose out on some of their more visually appealing features.
- Keep in mind the familiar adage of “ask for money get free advice, ask for advice get money”. When you start pitching investors, especially if you are too early, you will get a lot of free advice and not a lot of investment interest. Breaking through that barrier is difficult and requires a well thought out fundraising strategy that properly highlights the investment opportunity.
- Gotham Gal has a great blog post on how to properly to connect with investors to ensure a higher chance of getting the opportunity to pitch them – Connecting and Pitching.
- And after you have pitched an investor remember to be respectful, especially of their time. Don’t be pushy or annoying and realize that it may take multiple meetings over a series of months before an investor becomes seriously interested in the investment opportunity. Mark Suster from Upfront Ventures has a great blog post that outlines why investors invest in lines, not dots.
Keep in mind that the work you do to prepare for raising outside capital will actually help you build a better business. And the higher the quality of your investor funnel, the better the chance you have of bringing value-added investors onto your team which should make raising your next round of funding easier.