From Pitch to Promise: Strategies for Engaging Investors, Building Trust, and Earning Commitments
INSIGHT
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.
Let's go:
Funding Stages - where are you now?
What NOT to Tell the Investors When Seeking Funding
What TO Tell the Investor When Seeking Funding
How to Tell a Good Equity Story
Investors Perception of Your Management Team When Seeking Capital Funding
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 to tell 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.
How to Tell a Good Equity Story
Most investors are seeking to find holes in either your business model or in you or your team. In other words, they are looking for reasons to say “no.” Writing a check is an exception that comes only after all the possible reasons to say “no” have been exhausted.
Before you start pitching, make an honest appraisal of your shortcomings and your ability to successfully convince investors that you can lead your company. You may be better off being a successful second fiddle than a failed conductor.
Plan to make a significant investment in honing your presentation style. Once developed, good presentation techniques will last for the remainder of your venture and beyond.
Develop an understanding of the hierarchy of validators that investors look for, and focus your early marketing efforts on targeting strong referenceable and paying customers. Paying customers is your most important trump card in convincing investors.
Make sure your attainable market share fits the objectives of your target investorsin advance of first meetings.
Be prepared to explain how and when investors will receive a return on their investment. Show such excellent returns in 5 years in your projections, even though investors will be giving you some slack and may be willing to wait longer to get the hoped-for returns.
Investors Perception of Your 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.
>> I hope you enjoy reading this blog post. If you want me to help you with your fundraising, just book a call.