How to Win Over Investors for Your Startup – Part 1
If you ever pitched startup investors, you know how hard it is. Investors want to bet on a winning horse – company that will become profitable in the long-term. Nobody wants to lose money but that’s the risk you take betting on horse races. And the same applies to investing in startups.
Pitching ideas and asking for funding can be nerve-wracking experience for first-time entrepreneurs. You might be the next Instagram, Uber or Facebook but the question is how do you convince people to invest in your idea?
This post will help you get into the mind of potential investors and increase your funding chances.
Before pitching investors, make sure you have covered the following points.
1. What is the specific customer pain you’re solving?
Venture capitalist and billionaire Vinod Khosla said it best: “If there is no problem, there is no solution, and no reason for a company to exist … Nobody will pay you to solve a non-problem.”
Before launching a product or service, determine what customer problem it solves. And this should be a product or service that solves a real problem today – not at some point in the future.
2. Is this customer pain monetizable?
The monetizable pain is the pain significant enough – 4/5 out of 5 on the pain scale – that a sufficient number of customers will be willing to pay for the solution.
3. What is the size of your market niche?
The significance of a problem depends on the size of the market to which it belongs. In order to be successful, a startup requires a big problem within a big market with a big consumer demand.
You have to differentiate between the total available market (TAM), serviceable available market (SAM) and target market (TM).
- TAM = How big is the market in your specific niche?
- SAM = How many people can be reached with your marketing channels?
- TM = Who are the most likely buyers?
As you go down from the TAM to TM, the numbers will get smaller. If they are too small, your startup will never become profitable.
4. Test and validate your product idea
Collect feedback from actual customers: survey them in person or via e-mail and evaluate the results. Without testing, it’s impossible to determine whether your idea corresponds to the monetizable customer pain.
5. Build a minimum viable product (MVP)
The MVP is called minimum because it has the core features of your product (must-haves rather than nice-to-haves) and takes as little time and effort as possible to create.
Techopedia lists three key features of an MVP:
- It provides enough value that people are willing to use it and/or buy it after its launch;
- It demonstrates sufficient future benefit to retain these early adopters;
- It provides a feedback loop that helps to guide ongoing development.
The key is to bring together the minimum group of core features and get feedback. All other elements that don’t contribute to learning at the initial project stage should be removed.
Know different needs/wants/expectations of different investors
Murray Newlands gives the description of different types of investors you should be familiar with.
1. Friends and family
During the beginning stage when your startup is considered high-risk, pitching wealthy friends and family is the way to get funding to get your prototype made and hit the ground running.
Start with a soft sell. Send your business plan and ask for their opinions, edits, and to forward it to any of their “wealthy” friends who may want to invest. Most of the time, it’s not a huge raise but it should be enough for a prototype.
Angels are the elusive investors everyone hears about, but no one seems to know. Angellist (www.angel.co) is a directory of individuals who are available and ready to invest. They have already funded several startups and have seen success. Some choose to be Angels because they are high-risk, high reward types, and others love tech.
3. Super Angels
Super Angels act like a small fund. They fundraise for your start up while you get the work done. You build the product while they go to their wealthy network and pitch the idea and continually infuse your business, so you don’t have to stress.
Investment Bankers raise capital and can act as a matchmaker. They search for investors usually for a fee. Investment Bankers can be useful because they will get you a warm introduction using their network, and will do the pitching for you. This is good because most venture capitalists don’t like cold calls from random entrepreneurs.
Crowdfunding is an option for startups to get funded and prove that their concept is popular and that it solves a problem.
Find and connect with potential investors
Here are practical steps to increase their likelihood of finding and connecting with potential investors:
1. Use Internet resources to research investors:
- Create an AngelList profile (describe your company, team members, product(s), so that investors can find you).
- Research Crunchbase and see who has invested in what, when, and for how much. This gives you insights into specific companies and people with whom you should try to connect)
2. Create a list of potential investors (30–50 people)
Include investors whose interests, areas of expertise and investment histories clearly align with the needs and goals of your company.
3. Use your professional and personal networks
Investors receive many pitches so they favor companies that are introduced by a common contact. Before asking a mutual acquaintance to introduce you to an investor, pitch the former first to convince that your company is worth the investor’s time.
4. Gather as much first-hand data on investors as possible
Talk to people who have previously worked directly with the investor; research the investors online; read their blog posts to see the issues they’re interested in.
Put together a list of companies in which they’ve invested in the past, determine how much money was invested and during which rounds of funding.
5. Ensure the investor is the right fit for your startup
- What relationship do you anticipate between your company the investor? What is the investor’s history in terms of his/her involvement in the businesses in which they invest (mentor, advisor, etc.)?
- Why do you believe that the investor has the proper experience, expertise, and professional connections to help your startup succeed?