Successfully convincing investors to fund your startup is not easy.
Although certain recent developments in the startup world have removed barriers to securing funding, it nevertheless remains true that new businesses often face significant difficulties when trying to recruit investors.
Atthe same time, the success of the Airbnbs, Facebooks, Googles, Twitters, and Ubers of the world (and countless other high growth startups) clearly demonstrates that fundraising is by no means impossible.
In this article I’ll discuss various strategies that founders can use to increase their chances of connecting and working with investors who are willing to open up their chequebooks.
I’ll also share a few hands-on examples of how some of our startups at Appsterrecruited their investors.
A Few Preliminaries
Before learning about and applying different methods for recruiting investors for your new company, make sure you understand the following crucial ideas.
First, there’s a huge amount of work that must be done before you can even start thinking about ways to successfully land investors for your startup (especially when your goal is to attract investment from sources outside of family, friends, and colleagues).
Amongst other activities, you must define and investigate the specificmonetizable customer pain to which your business will provide a solution, determine the size and unique demand(s) of the market niche in which you will operate, test and validate your product idea, and build a minimum viable product (MVP).
Second, you must develop a solid grasp of the particular economics involved in running a startup.
Third, it’s vital that you comprehend the different needs, wants, expectations, and abilities of different kinds of investors.
Murray Newlands provides a very helpful and concrete description of 6 different types of investors — i.e., friends/family, angels, super angles, VCs, investment bankers, and crowdfunders — with which you should familiarize yourself.
Darren Dahl also discusses this important matter, pointing out that whereas VCs typically look to invest $3–5 million and private equity groups sometimes seek to invest tens of millions of dollars, angel investors frequently restrict their funding to several thousand dollars at once.
As another example, Fred Wilson points out that his VC firm, Union Square Ventures (USV), restricts itself to funding startups that have already created a tangible product:
“We like seed investments in which teams have built and launched a product already. We don’t like investing in a concept or participating in a round where the uses of the capital will be to build and launch a product. This means the vast majority of seed rounds are not a fit for us. We pass on a lot of seed stage opportunities because it is ‘too early’ for us.”
I’ll return to this point shortly when I discuss the importance of performing your due diligence when attempting to connect with a potential investor.
Perfect Your One-Sentence Pitch
I recently discussed the importance of the one-sentence pitch in the context of PR and contacting the media:
“Before you engage in any concrete efforts to contact the media or any other publics in an effort to generate some positive PR or investment for your startup, you must first develop a one-sentence summary pitch.
This one-sentence pitch is the essence of the story that you will use to try and “sell” your company to the people to whom you’re pitching.
Members of the media and investors like Angels and VCs receive numerous pitches from all sorts of people and organizations every single day.
In order to stand out from the all “noise” generated by your competitors, you have to present your pitch in a clear, concise, meaningful, and compelling way.
In order to do this, you must be able to summarize in one sentence the key reason(s) that a journalist might want to interview you or an investor might want to fund your company.
Avoid buzzwords and unnecessary technical jargon and make sure that your one-sentence product value proposition clearly states the major problem to which you’re responding, the specific group of people (or section of the market) you’re targeting, and the unique value of the solution you’re offering.”
How can you go about perfecting your one-sentence pitch?
Adeo Ressi from the Founder Institute has put together a fantastic and simple resource that allows any given founder to effectively express the essence of his/her startup in a single sentence.
Many of our startups at Appster use Ressi’s template (or a similar approach) to distill the fundamentals of their companies into 5 or 6 clear and easy-to-understand lines:
Once you have compiled your one-sentence pitch along these lines it’s then time to strategize ways to connect with investors.
Practical Steps to Locate Investors
In a guest post for Forbes, The Muse outlines various practical steps founders can take to increase their likelihood of finding and connecting with potential investors.
Three of these strategies in particular are worth discussing:
- First, utilize key Internet resources to research and track down investors:
- Create an AngelList profile, describing your company, team members, and product(s), so that investors and other startups can find and learn about you.
- Research similar startups operating in your specific industry by searching on Crunchbase; this website makes it possible to look up a specific company, person, or investor and see who has invested what, when, and for how much (thus giving you insights into the specific companies and people with whom you ought to try and connect).
- A site similar to Crunchbase, which is also worth examining, is CapRally.
2. Second, create a strategic list of potential investors:
- Put together a list of 30–50 professionals who could conceivably represent a solid fit for your company from an investment standpoint.
- One way to do this is to research investors on AngelList in accordance with the specific industry/niche in which your company operates.
- Because investment is a game of numbers, it’s important to cast a wide net when first compiling the list. However, it’s pointless to include investors whose interests, areas of expertise, investment histories, expectations, and/or kinds or amounts of capital clearly do not align with the needs, goals, and state of traction of your company.
- You can store names and contact details (preferably email addresses) in a basic spreadsheet or a simple Customer Relationship Management (CRM) software.
3. Third, leverage your professional and personal networks:
- “Because investors receive so many pitches, they often highly favor companies that are introduced by a common contact.”
- After carefully compiling a list of investors with whom you’d like to meet, comb the list person-by-person to determine if you share any mutual acquaintances.
- Before asking a mutual acquaintance to introduce you to an investor, it’s important that you take some time to pitch the former first, i.e., to convince him/her that your company and vision are worth both his/her and the potential investor’s time, energy, and consideration.
- Finally, ask for the referral and make sure you deliver when the introduction finally happens.
To this list we can add a fourth strategy, i.e., attending meetups and industry events in order to meet with potential investors in person.
Meetup.com is one excellent resource to consider in this context.
Feel free to check out this article by Murray Newlands, which outlines several additional practical techniques that startups can use to locate potential investors.
The Need to Perform Investor Due Diligence
As with many other aspects of business, adequate preparation is key to creating successful investor meetings.
Regardless of whether you get introduced to an investor via a mutual acquaintance or you rely upon a “cold email” in order to reach out to any type of investor, it’s crucial that you do everything you reasonably can to facilitate a solid fit between you, your company, and the investor.
Since you’re the one seeking to convince another individual or firm to invest in your company, the onus is clearly on you to learn as much as about that person or business before pitching your startup.
There are two basic ways to perform your due diligence.
First, continue to exploit your professional networks by uncovering as much information as possible about the investor through conversations with people you already know.
In today’s increasingly connected and global world, it’s very likely that you personally know one or more people who are somehow connected to the investor whom you’ll be meeting and pitching soon.
Try to gather as much first-hand, “insider” data as possible (e.g., from people who have previously worked directly with the investor).
Second, research the investor or firm online.
Consult online portfolios and mission statements.
Put together a list of companies in which they’ve invested in the past (being sure to try and determine how much money was invested and during which rounds of funding).
Read the investor’s/firm’s blog posts to get a sense of the issues in which they’re interested and companies in which they’re involved.
In other words, never go into a meeting or a pitch (whether in-person or via email) “blind”.
When trying to ascertain whether an investor represents an appropriate fit for you and your startup, it can be helpful to think about the matter from 3 different perspectives:
- Relationships: what kind of relationship do you anticipate would develop between you, your company, and the investor? What does the investor’s history suggest in terms of the extent of his/her involvement in the businesses in which he invests? For instance, is he/she likely to act as a kind of mentor or advisor? Or is his/her role expected to be more “hands-off”?
- Functional capabilities: what makes you believe that the investor has the proper experience, expertise, and professional connections to help your specific startup succeed?
- Focus: what evidence is there that there is a strong match between, on the one hand, the current operations of your startup, your company’s needs, and the specific funding round in which you’re currently operating and, on the other, the capabilities, history, and funding focus of the investor or firm? — source
How to Send the Perfect Cold Email
Investors typically receive thousands of emails every single week, many of which are unsolicited, i.e., sent by people with whom the investors have had no previous interactions.
The fact is that such huge numbers lead investors to delete or otherwise ignore the vast majority of unsolicited emails they receive.
Nevertheless, it is possible to effectively recruit a new investor for your company by engaging in this kind of “cold emailing” technique.
How can you go about perfecting your cold email approach?
First, here’s a helpful list of major DOs and DON’Ts I outlined in a previous post:
- DO personalize your emails by using the investor’s first name, referring to one or more key elements of his/her investing history or current professional involvements, and demonstrating that you’ve put some thought into the reasons why he/she is a fantastic fit for you, your company, and your major objectives;
- DO restrict your cold email to approximately 5–7 sentences total;
- DO experiment with different subject headlines and variations of your one-sentence pitch; be sure to use analytics software to determine the differences, if any, between email open and/or response rates;
- DO politely follow-up and ask for feedback if you don’t hear back from an investor within a reasonable period of time (e.g., 7–10 days);
- DON’T haphazardly send out generic pitches to many different investors without any regard as to why these particular Angels, VCs, etc. might be a great fit for your business;
- DON’T write extremely long, ultra-detailed emails full of pointless background data and/or over-the-top language; and
- DON’T harass investors by sending numerous unsolicited follow-up messages and/or begging for re-consideration.
Second, be sure to check out Jason Calacanis’ video wherein he discusses how to effectively write clear, concise, short, and impressive cold emails that lead people to actually respond to unsolicited messages.
Jason recommends that startup founders seeking to attract the attention of, and to secure investments dollars from, high-status investors submit cold emails that:
- Unambiguously reveal and establish the company’s traction (especially via use of visuals like infographics and charts);
- Are clear, easy to read and to understand, free of technical issues, and distilled to the main points rather than concerned with the minute details;
- Explicitly ask recipients for their advice/guidance rather than their money; and
- Effectively establish a personal/genuine connection with the investor, especially by referring to or commenting on something that’s directly relevant to his/her own writings, actions, current or past investments, and/or interests.
Additionally, Jason outlines a basic cold email template that we here at Appster encourage our clients to embrace and apply.
Here’s what the Appster cold email structure looks like:
In essence, then, it consists of:
- 1) a few sentences that are all grammatically correct, personalized, relevant, easy to grasp, and simply stated,
- 2) product wireframes, screenshots, videos, or external URLs, and
- 3) a polite request for a brief meeting at the recipient’s convenience.
Perfecting Your Pitch
Once you have successfully convinced a potential investor to meet with you, the next step is to put together your full pitch.
Not only must the pitch itself be solid, well supported, and tailored to the specific investor(s) to whom you’ll be speaking but you must also develop the ability to deliver your pitch in a compelling, passionate, and confident manner.
So, yes, this means that you must practice giving your pitch over and over and over. Try and accumulate as much feedback as possible and dedicate yourself to constantly refining your pitch based on the critiques you receive.
Darren Dahl stresses that investors typically evaluate a company’s potential for success and growth by asking themselves 4 key questions:
- “Does the company’s product or service address a large and growing market need?
- Can the company scale quickly enough to take advantage of that market opportunity?
- Does the company have a defensible competitive advantage? And
- Can the management team execute on the potential outlined in the first three criteria?”
These, then, are some of the primary questions that you must keep in mind when constructing and delivering your pitch.
In other words, your pitch must feature insightful, unambiguous, and compelling answers to these core questions.
Here are the essential elements of a strong pitch:
- Because investors encounter pitches virtually every day, you need to “shake” them out of their familiar routine by “hooking” them via the use of something that grabs their attention and forces them to listen to what you have to say.
- Your hook could be an interesting industry fact, an ongoing (or soon-to-arrive) crucial market shift, or a unique personal (but short) story that you have good reason to believe will connect with the investor.
- Be sure to avoid cliché statements, such as promises about trillion dollar markets or technologies guaranteed to disrupt the industry.
- Identifying the major problem, i.e., the monetizable customer pain, to which your startup seeks to offer a solution is absolutely essential to investors.
- The bigger or more intense the customer pain, the higher the chances of success for a company that knows how to solve it.
- Make the investor truly understand and “feel” the pain, e.g., provide examples and trace out in specifics the implications of not solving the problem.
Unique Value (Secret Sauce):
- If the problem is truly worthy of solving then the chances are that many “solutions” already exist in the market.
- As a result, you need to demonstrate how your proposed solution differs from all others in a meaningful and noteworthy way.
- Is it more efficient? More effective in certain respects? Cheaper? Easier to source and/or scale? More user-friendly? Etc.
- Many investors believe that the size and demand of a given market represent one of the, if not the, most crucial determinant(s) of a startup’s likelihood of success.
- Use statistics and graphs to prove to your potential investor that your market niche is already huge and/or expanding rapidly.
- Providing a top-down analysis is important: demonstrate that you’re operating in a (very) specific subset of the market you’re targeting rather than using a highly imprecise categorization (such as 18–35-year-old men in the U.S.).
- When it comes to fundraising, traction — i.e., proof that your company is gaining users/customers, generating buzz, and bringing in revenue — is king.
- If you have traction then you should absolutely demonstrate it via the use of data and graphics; if you haven’t yet collected enough metrics to make your traction evident then you must otherwise convince the investor that your operations are solid and moving along at an impressive pace.
- Metaphorically, your goal should be to convince the investor that your startup is a fast-moving train that he/she would be wise to jump onto as soon as possible.
- Always keep in mind that, at the end of the day, investors invest in people, i.e., in the real-life individuals behind impressive ideas and earnings.
- Ideas on their own are basically useless; it’s people who execute ideas and thus it’s people who allow great companies to emerge.
- It’s important to show the investor that your startup team is solidthrough and through, i.e., comprising members who are hard working, intelligent, committed to success, and action-oriented.
- Prove your team’s ability to get things done by discussing past successes and triumphs.
- Always keep in mind the famous “ABC rule” from the 1992 film Glengarry Glen Ross: Always Be Closing.
- Once you’ve finished your formal pitch, take the next step to move closer to a deal.
- Hand out your, and ask for his/her, business card; try and arrange a date and time for the next meeting; schedule a follow-up phone call.
- In other words, manage your “pipeline” and keep the momentum going. Never leave a meeting without having the next point of contact confirmed in advance.
Thanks for reading!
Originally published at http://www.appsterhq.com