You must have a good business idea, to raise outside capital for your startup, but what does that really mean?
Understand Your Customer Focus
You need to understand your target customers, and have positive feedback from at least some of them indicating that they will use your solution. You need to understand the customer use cases, customer acquisition costs, your sales and go-to-market model, the gross margins, and the marketing & product development costs. You need to be able to paint a mental picture of what you ideal customer looks like. Clearly articulate their pain and problems. What do they lose sleep over?
Clarify and Articulate Unique Value Proposition
You have to be solving a critical problem for real customers in a way that is different than anything available today. It has to be a problem that is difficult to solve, and your solution must be hard to duplicate. You must have a unique value proposition, and you must have some “secret sauce” or intellectual property that is defensible.
Perfect the Business Model
The business model must make sense, but what does that really mean? You need to be addressing a large market that is growing fast. The industry structure dynamics must be suitable for you to penetrate the market and maintain a defensible competitive advantage. This will result in a business where you can drive significant revenue growth and ultimately earning growth.
Know the Cost of Running the Business and Key Milestones
You should have an intimate understanding of the costs for running your business for the next 12 to 18 months, which is typically the “time horizon” before you’ll meet your next funding milestone. For example:
- Have you launched a beta version of your product?
- Have you signed-up your 100th customer?
- Have you shown multiple successive quarters of exponential revenue growth?
- Have you reached break-even revenue?
Any milestone you select should be a validation point in the business model that drives the next step-function in the valuation of your business.
Build a Stellar Team and Show a Track Record
You need to have a focused, passionate, and high quality team. You need to have a strong leader. You should only hire employees that are critical to the task at hand or part of your core competencies. Ideally, you’ll have very good preliminary customer feedback that validates your idea.
It is best if you have a track record of execution during the bootstrapping phase, and a historical track record of success in other companies. Even if you’ve had past startups that have failed, you need to explain why they failed, what you learned, and what you’re doing differently this time. If you don’t have a historical track record yourself, then ideally you’ll have strategic and technical advisors to the company that have a strong track record. In all cases, you need to have passion, commitment, and drive. Investors will look for those things. You need to really understand your market, your customers, and your business model. You need to show that you can learn and adapt to an ever-changing environment and constantly changing circumstances. Finally, you must be honest, and have high integrity.
Identify the RIGHT Angel Investors for Your Company
In order to find the right Angel investors for your business, you need to clearly identify what you’re looking for. The saying, “All money is green”, is not a good mantra when seeking Angel investment. It is always best if you can identify “smart money” investors that have domain knowledge in the vertical market that your solution is addressing. Even though smart money Angel investors might be tougher negotiators on valuation and deal terms, they will have passion for your deal if it makes sense, and they can be good mentors for you as well. See my article Smart Money Startups – Why is it Important.
Show Competence, Confidence, and Passion
Once you get a meeting with a prospective investor, be ready to describe the REALLY BIG PICTURE and the PROBLEM YOU ARE SOLVING. Ideally, you want to create a visceral reaction in the potential investor. You THEN need to talk about your solution, why it is unique, and why it has value for CUSTOMERS, and how it REMOVES PAIN for the customers. Show your CUSTOMER VALIDATION DATA. If you don’t have any, then get you should get some before trying to raise outside money.
Articulate the amount you need to raise to hit the next key milestone that results in a step-up in validation and valuation. This is typically 12 to 18 months away. Clearly describe the use of funds. Make sure that your plan has you only hiring critical resources. Don’t show a business plan where you pay yourself, your co-founders, or your key managers big salaries. Be sure to “ask for the order” at the end of the presentation.
Investors Invest in YOU Personally – Be Aware
One of the most overlooked things by entrepreneurs is how Angel Investors and Venture Capitalists look at deals. It is as much about the leader of the company as it is about the product and the business. It all deals with trust. Investors, like all human beings, are motivated by fear and greed. Fear is predominant. Investors will not say it, but they will think it and assess it: “Can I trust this person with my money?”. Once they are convinced that you are trustworthy, loyal, and operate with integrity, then they will look at the business and can they make money. See my video Investors Look at YOU Personally When Making Funding Decisions.
Have a Business Model that Shows a Return on Investment
Bottom-line, investors must believe that your company is addressing a market that is of sufficient size and growth that early stage investors have the ability to make a 10X return on their money in less than 10 years. Angel investors also like cool ideas, but they know that Venture Capitalists look at deals from a ROI lens, and VCs will be the predominate source for subsequent rounds of capital financing. Read my article and watch the video An Inside Look at Venture Capital from the VC Perspective.
Prepare for the Right Amount of Time and Effort to Raise Capital
Typically, preparation and pre-marketing takes two to four weeks. Marketing your deal usually takes 30-60 days. Once you have a lead investor, it may take a week or two to negotiate a term sheet. If it is a simple convertible debt offering, then it could be quicker. To fully subscribe to the offering, you need to circle the remainder of the money from your marketing period. Use committed investors to help convert the rest of the prospective investors. Negotiating on the term sheet, and closing on a preferred stock round of financing can take 30-45 days. Always be prepared for things to take a little longer than you plan.
I hope you found this article helpful. Please share with us your thoughts and experiences about getting Angels to invest in your business idea. I’m also always interested in seeing interesting companies as investment opportunities, so show me your ideas!
This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters.