By Michael Blakey & Will KLIPPGEN
Over the years, we have received thousands of emails, LinkedIn messages, live pitches, and even phone calls. Looking back, we discussed the top five areas where founders can improve the most when trying to convince investors to come onboard:
#1: Approaching the wrong investors at the wrong time
Most investors have quite specific preferences when it comes to both investment size, company stage and vertical. If you’re raising your first round of e.g. $500k and you’re pre-revenue, then approaching a Series A VC is usually an absolute waste of time. Most venture capital funds are large, but the number of partners is limited. To give partners enough time to manage their portfolio, the investment per startup has to be at least a million, often more.
Investors, both big and small, often have clear preferences for verticals. This can be driven by a general belief in which will create good returns, but also from the professional backgrounds of the partners.
We recommend to find which investors know your industry well, and only contact them. If you don’t, the most likely outcome is rejection, as good investors want to understand what they are investing in. The second is that you receive interest and possibly, an investment from an investor with little or no ability to add value to your business.
Bottom line: Only contact investors who can invest the amount required and who understand your space
#2: Generic cover letters
Investors tend to get a lot of emails and messages every single day. A common trap founders fall in, is to think raising investment is a numbers game – the more investors I contact, the higher my chances. On the contrary, we believe you should contact only a few, handpicked investors that are relevant to you (See #1) and take time to learn about them.
Also, especially later stage investors, will only look at opportunities that have come through a trusted source and cold emails are automatically rejected. If you do contact an investor directly, who you’ve not met before, personalize the email. You can usually find a information both on them and their past investments online (e.g. LinkedIn, Crunchbase, Angel List). By doing this preparation work beforehand you’ll ensure that you’re not only approaching the right investor, but also show your level of professionalism to the investor.
Bottom line: Know who you are talking with and craft your message accordingly.
#3: Not being prepared
Make sure you’ve got all documentation ready before talking to investors. What we would suggest is that you put together a Due Diligence folder which contains things like: Presentation, Financial Forecasts, Legals, Employments Contracts.
When presenting to an investor make sure that you’ve rehearsed it thoroughly beforehand. Stumbling though your presentation doesn’t give the investor a great deal of confidence. Also, make sure you know the key numbers of your business. One of the most common mistakes that we see is when an investor asks a basic question around the numbers e.g. about when you reach break-even and you’ve got no idea. We totally understand a non-finance CEO might not be able to define the NPV formula, but they should be able to explain the assumptions in the Excel sheet that drives the revenue forecast. As the CEO, you are the one approving spending and you should know exactly where dollars will be spent and what they will achieve.
We also put a lot of emphasis on learning from competitors (if they exist). If you are pitching a localised version of an existing business model elsewhere, we expect you to know a lot about existing companies with the same model. We think you should know about recent merger and acquisitions in your space and the key metrics used to derive valuations.
Bottom line: Understand and memorise the key facts across tech, marketing and financials before pitching to investors
#4: Raising too much or too little
We think good founders spend too much time fundraising. One hour spent chasing investors could be spent on building your product. Fundraising takes time, although a common misconception is that it quite fast, once the investors like you. In reality, even a small fund-raise can take 3 to 6 months to complete and can be a full time job for a founder. We therefore recommend to raise enough capital to stay afloat for 18 months, so that you get at least 12 months without having to worry about cash. Also, by raising to little money you’re putting your company at risk, as it’s very rare for an early stage companies growth to go smoothly. It’s very common for things to take longer than expected or even to have to pivot your business and if you don’t have enough money to allow you to do this you’ll find yourself in a funding bind.
Raising more capital would usually lead to your shareholding becoming too diluted, as you normally can not command a very high valuation early on. Also, from past experience, we’ve found that those companies that have raised to much have not spent the money in the most economical way. Believe it or not, but good investors are actually just as concerned as yourself about how much you own of the business going forward. Founders who sit back with only a small share of their own business can not be expected to be very motivated.
Bottom line: Raise enough to keep you cranking for 18 months, but not more.
#5: Failing to define problem being solved and how you are different
The startup world sometimes seem to be driven by fads, and just as “big data” started to disappear from pitches, “blockchain” luckily came to the rescue… (We like blockchain startups, don’t get us wrong).
First, we want to understand which problem is being solved. If it is an existing problem, you should use numbers and facts to describe just how big it is and how much consumers or businesses are aware of it.Is it a problem that will increase with time or is it going away?
Secondly, we need to understand how your solution to the problem differs from similar startups already in the market. We are not saying that copying or being similar to other startups is wrong. On the contrary, we believe that copycats have a reduced risk of failure and can grow to billion dollar businesses. In particular when they are launched in new markets. But, the business plan must contain enough detail on how the combination of idea, execution & market sets your business apart from the others.
Thirdly, it goes without saying that you need to make it evident that you can solve this problem in a way that is scalable and creates great profits! We tend to advice to use “bottom-up” forecasts and not “top down”. Instead of suggesting that you will take 10% of the China market, and calculating your revenue based on that, we rather see you discussing how many products each sales person or sales channel can sell.
Bottom line: Be very clear on how your idea and/or execution and/or your target market is significantly different from other players in the market.
When raising funds, particularly for early stage companies, entrepreneurs needs to be aware of that how they conduct themselves in their fundraising, is used an indicator for investors to ascertain their overall level of professionalism and ability to execute. Which makes it even more important to do it well!
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