A step by step guide for how to raise money from investors for your startup. This is the biggest guide I’m ever going to write for you guys. Enjoy it. Learn from it. Love it or hate it, whichever floats your boat today.
This is also written from the entrepreneur’s side of the table, which is a very different perspective from the investor’s side of the table. Investors are the one’s investing, so they usually see how they are, and how they want it done. But from the other side you have to pitch to probably on average 100 different investors, that all want something different. Not to mention, as entrepreneurs…we always have our own idea of what we want. It gets pretty shitty & confusing at that point. So that’s why I’m writing this, to help you guys navigate through that as an entrepreneur.
1. Develop traction before you try to raise money from investors
No one likes to hear this part, BUT IT IS THE MOST IMPORTANT PART TO RAISE MONEY. And it’s not a “this will help you” type deal. This is a “you need some traction” type deal in 99% of the times you raise money. You cannot raise money with just an idea or a business plan. There is two exceptions to this rule: a) you are extremely well connected with possible investors (ie: you have known them for years), or b) you have a large amount of credibility (ie: you were the Founder of Paypal). The rest of us will need traction in order to raise money from investors.
Traction is not always revenue, this is a common misunderstanding.
With this being said, your priorities with traction are at least one of the following: a) growth b) customer validation or c) revenue. Note all 3 are not the same when you go to raise money from investors. Growth does not always need revenue to be considered traction. And customer validation may not equal revenue and traction at this point in time. Which type of traction should be your priority when you raise money from investors? It depends on the investor, the business, the product/service, and the focus of your business model. Service based businesses tend to focus first on revenue, product based businesses tend to focus on customer validation, and internet based businesses tend to focus on growth since they are valued by their user base.
For example, let’s look at a an invention vs. Plan to Start. An invention would be more focused on customer validation, and the amount customers were willing to pay for the product. At that point, it would be easy to raise money from investors having proved customers want the product, and proved a profit margin. At Plan to Start (this site), an internet company’s business model is dependent on large numbers of users/traffic. So we focus on growth first and foremost (there is also a number of other factors involved here in internet companies, such as LTCV, etc…but that’s an article for another day). It actually took us a year to figure out the exact strategy that could achieve the growth we were looking for, without spending money. Lots of “ok, this is really going to work”. “Nope, that didn’t work”. This will probably be the first year of your startup’s life in the market as well. It’s all trial and error. But this trial and error is traction. You have to go through the bad stuff, to get to the good stuff. There is no way around it, and sadly…this burden is yours to carry alone (or with a partner) before you can raise money from investors.
2. Arm yourself with the right pitch documents to raise money
When you raise money from investors, have a standard pack of documents ready to go. Please note, you will never release all these documents at once. That frustrates the hell out of investors to just receive a huge hump of documents from someone they don’t even know. Here, we put together:
a) one page summary
b) 8 page executive summary
c) financial projections package from EZ Numbers and
e) deal sheet
Release the one page summary to an introduction or a prospective investor. Release the 8 page executive summary to someone who requests more info. Release the financial projections package to those who request it (this means the investor is very interested). Obviously, release the powerpoint at presentations.
3. Target the RIGHT investors
Understand your business model, your industry, the amount you are seeking, and the stage you are in. Make sure all of these match each perspective investor. The better they match, the better your chances are at raising money from investors.
But just as important, is profiling your investors just like you would profile your customers. Understand what type of investors they are (angels, intros, leads, etc..see below). Some investors don’t invest in entrepreneurs they don’t know, for example the Foundry Group usually invests in entrepreneurs they have known for years that fit their themes. Other investors, for example Dave McClure, are known for walking into a meeting, meet you for the first time, and commit to you right there. He follows the f—ing spray and pray technique, in his own words (ha..I enjoyed reading that). It depends on the investor as to how to raise money from that investor. PROFILE THEM. I cannot stress that enough.
4. Find investors for your startup
Get out your excel spreadsheet. Make a list of every possible wealthy connection you have. Anyone that could be prospective angel investors, VC’s, introductions, etc. Some investors are open to receiving “blind pitches”, some are not. If they are not, they will just ignore you. LinkedIn is probably your most valuable tool for this. If an investor is not open to receiving blind pitches, just try to send a request to connect on LinkedIn. Then view their connections. Try to find someone who looks like they may make an intro to the investor for you. Also, DO NOT use the introduction tool on LinkedIn, people who may make introductions to investors have to screen you first.
Prepare for a lot of traveling, and ring around the rosy, type ordeals here. This is normal. Don’t get frustrated. Just keep going…
5. Keep small investors warm, and find that lead investor
Like a startup, an investment often needs a clear leader. There will likely be two types of investors you find: the smaller one’s (25K-50K), and a lead. What is a lead investor? He’s your main man, he’s the champion of your deal. He’s usually experienced, think of him as the “pack leader” for your other investors. Fred Wilson is an example of a lead and he clearly states “I don’t know how to be anything but a lead”. You will know when you find a lead, and they are the hardest to find. It will be like finding a needle in a haystack.
Finding a lead investor will probably consume 12-18 months of your startup’s life. The smaller one’s are usually less experienced, and will want to wait until you find a lead before you can actually raise money from those investors. Why? If they go in at a 25K investment, it might give you a few months runway, then you’ll probably die anyway. It’s much safer (and less stressful) for these investors to wait until you find the lead investor. Keep those investors warm in the meantime. Send them updates about once a month.
Watch and wait investors
Many entrepreneurs and startups start trying to raise money from investors before they are ready. This can either hurt you, or be good for you. I did this, and in some cases I found it beneficial. Investors often know before first timers do if your startup is ready or not, and will approach you with the “watch and wait” scenario. You can usually tell which investors are doing this because they’ll make a point to connect with you and/or monitor you, but won’t ever speak to you. This usually signals that an investor has spotted an early deal, but doesn’t want to ruin the relationship by reaching out to you too early. Like entrepreneurs, investors often learn from past experiences, and may have killed a good potential deal or two by reaching out too early before in the past. Us entrepreneurs have been debating for a while know as to whether or not this should be considered offensive or what, but who knows.