In the early stages of a startup’s life cycle, founders often consider several opportunities for outside investment. Why wouldn’t they? While each company’s needs are different — including its target market, existing and future competitors, opportunity to scale, and actual need for capital infusion and advisory support — there is little question that the right investment opportunity can make all the difference in company growth, market dominance and profitability.
Yet, despite the consistent need for investment and a plethora of investor opportunities, many startups struggle to find an investor audience; fail to impress at crucial points in the conversation; or, even if they navigate the complex processes to secure investor proceeds, do not successfully implement the operational mechanics required to achieve sustainable growth.
In reality, it isn’t easy. While investor opportunities remain plentiful (even in the COVID-19 era), far too many startups fail to adequately plan around future receipt of investor funds, lack the experience to prepare for the tough questions asked by investors or simply don’t know how to strategically deploy investment capital through a results-driven approach that produces success.
The following can help get your company on the right track.
You know your company better than anyone, but don’t expect investors to immediately agree with your viewpoints.
Be ready to convince investors through data-driven evidence without overselling your idea because, well, it’s your idea. Most investors — including angels, venture capitalists, private equity firms and corporate sponsors — review and hear from tons of founders and startups each year. They’ve heard it all, likely have an investment thesis and may rely on limited partner-backed funds that are specifically tailored to a market in which your company fits. But that doesn’t guarantee they’ll see the brilliance of your approach.
Before reaching out to investor groups, ensure you’ve vetted your own company with independent analysis. Pitch at startup events, take advantage of “office hours” and advisory opportunities with incubators and accelerators, proactively solicit constructive feedback and criticism from other founders and startups working in corollary markets — although you may want to consider utilizing simple nondisclosure agreements to limit concerns over idea theft.
If, after doing the above, you feel you’ve addressed (or can address) nearly any question, concern, or recommendation levied at your startup with factual, data-backed responses that fundamentally support your startup’s central thesis, you’re ready to speak with investors.
Once you’ve fine-tuned your company’s pitch to the point of perfection, carefully prepare for your specific investor audience. Hint: They’re not all the same! The motivations of an individual accredited angel investor from your hometown are not the same as those of a regional accelerator offering seed capital on a convertible note basis, which further vary from a venture capitalist purchasing a majority shareholder stake and seeking aggressive returns on a 3-4 year basis. Before asking someone to write you a check, know who they are, who they’ve invested in previously and what their expectations are for your startup. Receiving investment is a noble end goal, but misaligned expectations often result in strained relationships that can actually drag down a company’s operations and inhibit future growth.
Beyond the “who,” ensure you have at least a foundational understanding of the “what.” When you approach investors, you should have a clear understanding of what you’re asking for (for example, raising $500,000 on convertible notes to support initial development of a core product versus raising $3 million in working capital to massively scale operations in new market territories). What are your terms of investment? Do they align with a defensible valuation of your company? Do they fit within the broader value proposition you’re pitching while adequately accounting for unknowns? Is the capital raise well tailored to your stated objectives, and will those objectives result in acceptable returns for your investors?
The point is, don’t ask for money if you’re not prepared to answer tough questions from investors. Although good investors will work with you to develop cohesive growth strategies and provide plenty of advisory support, they’ll want to know you’re deeply committed to the company’s success and have prepared for receipt of investment funds by expertising yourself (and your company) on what it will take to succeed.
You’ve built a company from the ground up. No one knows your startup better than you, and you’ve found a valuable investor audience that believes in your vision and is willing to back it with capital and advisory support. If you’ve made it this far, you know the road to success isn’t over — it’s just beginning. It will take significant effort to maximize growth while remaining compliant and avoiding classic pitfalls like cofounder disputes, employment and labor law concerns, intellectual property theft or dilution, and overzealous spending habits.
Don’t forget, you’re spending someone else’s money — they’ll expect transparency and accountability. If you believe in your startup and think others should too, plan, prepare and produce.
Jan Roos is a licensed business attorney providing growth-oriented legal support to California companies, including investment and acquisition work. He can be found somewhere between Lake Tahoe and the California coast.
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