From Pitch to Promise: Strategies for Engaging Investors, Building Trust, and Earning Commitments
Whether you're seeking support through crowdfunding, angel investors, or venture capital, this guide will offer tips on how to create trust and get commitments from potential investors.
Funding Stages - where are you now?
We have the opportunity to meet a lot of entrepreneurs at different funding stages in their life cycle. One thing that I’ve found is that it is important that you communicate to investors which stage you’re in and, if possible, how many rounds of funding you anticipate before exit. You can bet the investor will form their own opinions, but it is important that you, as an entrepreneur, give this serious consideration and show the investor that you have done so. It will go a long way in establishing credibility.
The first stage of funding, called seed funding is at or very near the beginning of the timeline. This is when money is spent on activities such as technical development, market research or in securing intellectual property rights. Basically, it is money spent evaluating potential viability and preparing for the commencement of operations. Most of the time this money comes from the entrepreneur’s own personal savings or from family or close friends. Institutional investors such as venture capital firms or angel investors usually see this stage of development as too risky.
The next stage of investment comes when the company needs money to get operations off the ground. This is known as start-up funding. The start-up financing stage is usually characterized by the business’ first revenues that fall short of supporting positive cash flow, hence the need for a capital infusion to fund operations until revenues are sufficient to sustain operations on their own. Sometimes start-up financing is dubbed series A funding, referring to the first outside capital brought into the company.
Once the business is on firm footing, there will come a time when more money is needed to support continued growth. This money may be used for things such as refining marketing efforts, hiring additional management and staff or new product launches. This round of financing is called growth or series B funding.
Sometimes companies have a seed round of funding followed by series A and series B rounds of funding then proceed to a sale or public offering.
The last stage of financing with the general purpose of preparing the company for a profitable sale or IPO is called mezzanine funding. Mezzanine financing is generally some combination of debt and equity that can lower a company’s overall cost of capital.
Funding stages can take on many different forms depending on the business and market in which it participates. At some point when cashflow is positive companies may elect to take bank loans to support operations or some companies may choose to move on to subsequent rounds of series C and D funding before exit.
Whatever your funding strategy, remember that each stage will require a valuation of your company and that too much funding will lead to dilution of the founder’s stake.
What NOT to Tell the Investors When Seeking Capital Funding
As a business founder seeking capital funding, there are certain things that you should avoid telling investors. Here are some examples:
Exaggerating financial projections: It's important to be realistic about your financial projections and not to exaggerate them in an attempt to impress investors. Overpromising and under delivering is a surefire way to lose investors' trust and damage your reputation.
Hiding risks and challenges: Every business has risks and challenges, and investors expect you to be upfront about them. Trying to hide or minimize potential risks can make you appear dishonest and untrustworthy.
Overselling your product or service: It's important to be passionate about your product or service, but overselling it can lead to disappointment down the line. Investors will appreciate honesty and transparency over hype and exaggeration.
Withholding information: Investors need to have a clear picture of your business, including financials, team structure, and growth potential. Withholding important information can make them question your transparency and credibility.
Criticizing your competition: While it's important to differentiate your business from your competitors, criticizing them can make you appear unprofessional and negative. Instead, focus on the strengths of your business and how you plan to stand out in the market.
Making unrealistic promises: Promising investors that you'll make them rich overnight is not only unrealistic, but it can also damage your credibility. Be honest about the timeline for growth and the risks involved in investing in a startup.
Overall, investors want to see a clear and honest picture of your business, including the potential risks and challenges. Being transparent and realistic can go a long way in building trust and securing funding.
What TO Tell the Investor When Seeking Funding
As a business founder presenting your opportunity to potential investors, there are a few key things you should communicate to make your pitch effective. Here are some examples:
Clearly define your business: Start by providing a clear and concise explanation of your business, including your product or service, target market, and revenue model. Make sure your explanation is easy to understand and emphasizes the unique value proposition of your business.
Highlight your traction: Investors want to see evidence of traction and momentum in your business. Share key performance indicators such as revenue growth, customer acquisition, and engagement metrics to demonstrate that your business is gaining traction in the market.
Emphasize your team: Investors want to know that your business is being led by a capable and experienced team. Introduce your team and highlight their relevant skills and experience, including any past successes or relevant industry expertise.
Address the market opportunity: Investors want to see that there is a large and growing market opportunity for your business. Use market research and data to support your claims about the size and potential of your target market.
Discuss your go-to-market strategy: Explain how you plan to acquire and retain customers, including your marketing and distribution strategy. Highlight any unique or innovative approaches you plan to use to reach your target audience.
Provide a clear ask: Finally, make sure you clearly articulate what you are asking for from the investors, whether it's seed funding, a round of investment, or another form of financing. Provide a clear breakdown of how the funds will be used and what investors can expect in return for their investment.
By effectively communicating these key elements, you can make a compelling case for why your business is a smart investment opportunity for potential investors.
Investors Perception of Your Management Team When Seeking Capital Funding
We've been talking about entrepreneurs so far and what their needs and realities are, and what I'd like to do is talk a little bit about the other side: investors and what their perception is, particularly when it relates to management teams, and how important is the management team? That's a great question, and if you think investors only invest in great deals and leave everything else on the sidelines, well, think again.
The management team is probably one of the most important components of the deal. The team is going to figure very prominently in any investor’s decision to fund the company especially if the track record is thin.
Here are some general insights and factors that investors tend to consider when evaluating a management team:
Experience and Track Record: Investors often look for management teams with a proven track record of success in their industry or field. They want to see that your team has relevant experience and expertise that will help the business succeed.
Leadership and Communication Skills: Investors want to see that your management team has strong leadership and communication skills. They want to know that your team can effectively manage the company and communicate with stakeholders.
Vision and Strategy: Investors want to see that your management team has a clear vision for the company's future and a solid strategy for achieving that vision. They want to know that your team has thought through the business model, market opportunity, and competitive landscape.
Financial Acumen: Investors want to see that your management team has a strong understanding of financial management and can effectively manage the company's finances. This includes things like financial projections, budgeting, and cash flow management.
Integrity and Ethics: Investors want to see that your management team operates with integrity and ethical principles. They want to know that your team is committed to building a sustainable business and will act in the best interests of all stakeholders.
Overall, investors want to see that your management team is capable, experienced, and committed to building a successful business. They want to know that your team has the skills and knowledge needed to overcome challenges and navigate the ups and downs of entrepreneurship.
What Does It Mean If You Are Turned Down When Seeking Capital Funding?
When a capital source really says no, what does that mean? Let's learn something from this. I tell the entrepreneur, you've had a number of face to face meetings with funding sources, and they turned the deal down, and that's tough. Let's debrief a little bit about what's happened and what they probably told you.
Let me give you an insider’s look and decipher what they've said to the entrepreneur when he gets turned down. Hey, we've all been turned down by financing before, and I think it's instructive to know, but more valuable as a learning tool when these standard push backs occur. They're telling you something, so let's be prepared. I think it's time to read the lines between the standard phrases they get back to you on.
They say, "I liked your company, but my partners didn't." In other words, no. if this person truly believed in the project, he'd vouch for you and get this thing going.
If they say, "If you get funding or a lead investor, we'll follow." And what that really means is, once your first round of financing is completed by someone else, we'd be happy to give you more, but let someone else take the risk.
They say, "Show us some more traction, and we'll invest." What that really means is, “I don't want to say no, because you may land a large customer in the interim. But right now, I just don't believe in it.”
They say, "We'd love to co-invest with other VC's or other angels." What it really means is, if your deal was worthy of a VC, they'd want it all for themselves.
When they say, "We love early-stage investing." What that probably means is a VC's dream is to put one to two million dollars in a pre-money company and end up owning 33% of the next Google. VCs aren't that risky. They only want to invest in proven teams with proven technology in a proven market.
So, there you have it. We've heard it all before. These are typical responses when they say no. So, be prepared to hear any of these and take it with a grain of salt.
There's always an investor to fund any deal. We just don't want a capital seeker to shut down after the first one or two turn downs. We can help re- purpose the deal and adjust it and turn that "no" into a "yes."