You have a startup or business and need to invest funds to grow. You know exactly how much you need and what you need to do.
The problem is you have exhausted all of your personal resources, so are now willing to trade part of your company for an influx of funds. But you are a bit apprehensive because you don’t want to give up too much and want to work with someone who shares your vision for the future of your business.
How can you find the right person or people to invest in your company?
Here are the five steps you can follow to get funded by your ideal investor as quickly as possible, with insights from investors and business owners who have successfully raised capital.
Step 1: Build a list of potential investors
First, you will need to identify potential investors. You can search for individual investors or can use online platforms that connect investors and businesses.
Brandon Bornancin, CEO and founder of Seamless.AI and a serial entrepreneur, says the approach that has generated the best results for him starts with building a list of investors who invest in the industry/market you operate in. This list should include venture capitalists (VCs) and angel investors. VCs are typically formed as limited partners who invest in business ventures often using money pooled from several partners, which is strategically managed in a fund. They provide capital for startup or expansion costs in exchange for an equity position in the company. Angel investors are individual investors accredited by the SEC. To earn such accreditation, these investors must have a minimum net worth of at least $1 million or an annual income of $200,000. They invest in businesses in exchange for equity, usually on more favorable terms and using their own money.
“Create a prospective investor list and cast as wide a net as possible,” says John Liston of Hello All Set, a former investment banker and growth equity investor.
When it comes to building the list, Bornancin advises using tools like Seamless.AI, LinkedIn, and Angel.co to gather as many contacts as possible.
“You will get a 10% to 40% response rate depending on how good your pitch/product is, so I recommend more vs. fewer investors at each company,” he says.
Bornancin adds you want to target venture capitalists with these titles, in order of priority:
- Managing partner
- Managing director
- General partner
- General manager
- Principal partner
- associate (only if all others not available)
- analyst (only if all others not available)
Going this route allows you to hand pick a pool of investors you predict will fit your needs.
In addition to building a contact list, you can also look at online platforms that connect business owners with investors such as equity-based crowdfunding sites. Circle Up is one of the leading companies in this space, and it has an investor base that includes venture capitalists, private equity professionals, retail and consumer product industry experts, business leaders and angel investors.Key takeaway: Build an extensive list of potential investors and check out online platforms that connect businesses with investors.
Step 2: Fine tune your list
When you take the list building route, the next step is to look at your list and fine tune it.
“Once your list is pulled together, visit the websites of potential investors and check out their investment criteria,” Liston says, adding that most investors list their preferred sectors, size, revenue models and current portfolios. “If you do not check all of the basic parameters they look for, then chances are outreach would be a waste of both of your time.”
Sacha Ferrand, CEO, and founder of Source Capital Funding, Inc. says that as a money lender, he comes “into contact with many individuals that are actively searching for startup investors. Although many variables are considered when searching for the perfect investor, be sure that you and your prospective investor are on the same wavelength.”
Ferrand explains that there is a misconception that startups aren’t allowed to be picky when looking for funding. He points out that the investor is often a big part of the decision-making process and so should have the same or a similar company vision as the startup does.
“It is often more beneficial to explore investors with prior knowledge and experience in your given industry, who would be able to relate directly to the products or solutions you are providing,” he says.
Michel Morvan, CEO of the CoSMo Co., has raised more than 3 million euros for his company’s expansion into the U.S. He advises that you should “contact businesses that your targets have invested in before and talk to their CEO. Create a trusting relationship with him/her to get insiders’ information and figure out whether the investor is the right person for you and your startup.”
He says that an investor is not just someone funding you, but also a source of support, someone with expertise. Therefore it is always good to investigate his or her previous investments further than just the types and amounts.
Ryan Farley of Lawn Starter, who has raised more than $7 million from investors, also advises looking for an investor who has had success with a business similar to yours but adds that it’s even better if you find an investor who missed out on a deal like yours that went on to be a big success.
“The former will be easier as that data is public; the latter is tougher but highly effective,” he says.Key takeaway: Save time and better your odds of finding the right investor by vetting your contact list for compatibility before reaching out. It’s also good to vet investors who send you offers through online platforms to ensure they will be a good match.
Step 3: Network
“Referrals are the lifeblood of success when raising capital,” Bornancin says.
Once you have a solid list of compatible investors, you should start networking. Bornancin says to leverage your own network to try to find people who can connect you with the individuals on your list.
Liston recommends a similar networking approach and says it’s best if the networking can start before you need money.
“Not only will it be a more natural introduction, but you will have the ability to request feedback from investors and address any weaknesses that they highlight,” Liston says. He also recommends using warm intros, which means you find someone who can introduce you to the investor, because most investors are inundated with intro and meeting requests and won’t respond to cold outreach.
What if you can’t find someone to refer you to a contact? Bornancin says you should put together a strategy to reach out to them using email, calling and social media. He says, “Prospect them as would a new client.”Key takeaway:Try to avoid cold calling/cold outreach to investors on your list. Leverage the connections you have to get referrals whenever possible. If you have chosen to use an online platform, it turns the tables so investors are coming to you with their offers and you don’t need to get referred.
Step 4: Make the pitch
Next, the time will come to make your pitches. Where do you begin?
“Create a plan, prepare for diligence and run the process formally,” Liston says. “Planning a formal fundraising process [in which you line up all parties on a unified timeline with various deadlines] is the best way to spur competition and maximize your chances of getting a worthwhile offer.”
For online platforms, this process is simplified because usually one pitch is submitted to the pool of investors online.
No matter how and where your pitch occurs, it should be carefully planned to appeal to the investors.
“Make sure you come prepared with a phenomenal pitch deck about the opportunity which highlights traction and revenue generated thus far as well as the expected investor returns,” Bornancin says.
Liston advises having all of the materials commonly found on due diligence lists ready. He adds, “It is especially important to know what you plan to do with every last dollar you raise,” which means a fully-thought-out projection model.Key takeaway: Plan a phenomenal pitch and ensure you have prepared the materials on the due diligence list.
Step 5: Select the best fit
After your pitches are all complete and you have received offers, you will need to make a selection. It should be based on who provides the best deal as well as what the investor brings to the table.
To identify the best deal on paper, Liston says, “make sure you have a lawyer, banker, advisor, mentor or someone else who has been through this process around that you can lean on for advice and use as a sounding board.”
“Term sheets can be complicated and, more often than not, the best deal is not the deal with the highest valuation as the devil is in the details,” he warns.
As for weighing which investor is personally the best fit for your company, you’ll want to look at his or her experience, reputation, and goals.
“You are much more likely to build a long-term lucrative partnership by making sure you and your investor are on the same page with a similar end goal,” Ferrand says. The only situation where this won’t be a factor is if you go with a loan that doesn’t give the investor equity, as they won’t have any stake in your company.Key takeaway: When making a final decision, weigh the terms of the deal as well as the experience, reputation, and goals of the investor. This way you can increase the odds of not only getting the funding you need but getting it from the right investor who shares the same vision for the future of your company.
Fund it yourself
Not all businesses are appropriate for third party startup investment. Startup venture capitalists are looking for billion dollar opportunities. Most small businesses don’t fall into this category.
If this is the case for your business, you’ll likely have to fund it yourself. You may need to tap into your own savings and may be able to get some help from friends and family to get things off the ground.
Many entrepreneurs get their business started through some form of credit. Your startup business is unlikely to qualify for traditional business financing without a history of revenue. Credit cards or personal loans can be a viable way to get things going in the early days.
Taking on a personal loan to fund your startup can be a powerful motivator to make things work and you won’t be giving up equity in exchange for the funds, which can be extremely valuable if things work out in the long run.
However, they may also offer less money than you could get through other approaches and approval depends on your creditworthiness. Of course, it also means you are on the hook if things don’t work out.
You can easily compare offers without hurting your credit score using SuperMoney’s loan offer engine.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.