One of the most difficult challenges in life is building a successful business; its not for the feint of heart. As investors, entrepreneurs, and those who have built and help build several successful companies, we combined our wisdom to share with those who are looking for the secrets of meeting investors, raising capital, and pushing their ideas forward to disrupt industries.
Many entrepreneurs have a well-thought out idea, some preliminary prototypes, a solid business plan, and a even a great pitch deck that’s gotten some traction. They have started building a team of experts around the field they’re starting to pursue. But they are hitting a wall with investors. The investors they have access to are either not familiar with their product or industry, or perhaps don’t even exist.
We run into so many hard working entrepreneurs who are out to solve a difficult problem, one that would be exciting if heard by the right people. The biggest hurdle for the business owner is finding the right investor to share their idea with. They spend hours on sites like Angel List, wasting time at crowded and boring meetups where they meet Angel’s who aren’t interested in their idea, because frankly, that Angel probably knows nothing about their industry.
The entrepreneurs we work with, fortunately keep pressing forward and never give up on their idea, product, or team. They keep pushing forward and learning from every elevator pitch, every meeting, and every “No.”
We understand this process all too well. We hear the stories of frustration, disappointment, and endless challenges, and watch some founders give up because they can’t get the capital necessary to push their dream forward, and can’t find the right people to make it happen.
Finding, pitching, and negotiating with the right investors doesn’t just happen overnight. It’s a long process, one that is fragile, and many things can go wrong along the way. Many entrepreneurs are so brilliant in their industry and product knowledge, but don’t know how to pitch their product. Others are even great at pitching – but for some reason they keep hearing a “No.”
If you feel like you are running on a treadmill trying to unlock the secret of finding, pitching, and negotiating with the right investors, this book was written for you. We wrote this book for entrepreneurs who are bright, know the problem they aim to solve, however, aren’t the most sophisticated in dealing with the small details with investors that can make a deal go sideways, or turn a great meeting opportunity into wasted time.
Often we watch business owners pitch to investors, or we’re pitched ourselves, and the co-founder is blind to what he or she is doing wrong. If you haven’t received money for your amazing idea, odds are, you’re doing something that’s off, and this book will help you identify where in your process you may be misaligning your pitch process with the investors.
This book is also for small business owners who need a crash course in the fundamentals of raising money – from the conception stage all the way to the growth stage. We cover which stage you’re in, who is the best person to raise from, how to meet that investor, the basics of terms and your business structure, and include advice from not only our team, other experts in the field who can help you take your business to the next level.
We firmly believe in the entrepreneurial spirit, and its our dedication to this process that has inspired us to reveal some of the best secrets and hacks to help you build your business faster and see success.
Funding your startup may seem like a daunting task. This can be especially true for someone new to the world of business finance, as there are so many avenues of funding to explore. This book will serve as a guide to start-up funding and will help business owners navigate the sometimes complicated world of business finance. I have spoken to investors, angel investors, bench capitalists, and business owners who gave successfully funded startups to learn the process involved in obtaining these funds.
One of the biggest reasons startups fail is a lack of access to capital, or capital at the wrong time. This book will also help entrepreneurs understand when to fundraise, how to meet investors, and who would be the best people to connect with throughout the startup process.
Understanding the stage of your start-up is the crucial first step in where you need to look for funding. Identifying which stage you’re in will be a great starting point in determining your personal next steps.
You have identified a problem, and you have created a product that might possibly solve it. You’ve a rough idea of how much it would cost. Typically in this stage you would reach out to wealthy friends and family who have set aside 10-20% of their portfolio for high risk investment and believe in your product to take it to the next stage. This is a stage where we start seeing a lot of entrepreneurs try to fundraise – unsuccessfully. Remember, you don’t need a ton of working capital, just enough to take yourself to the next step and a little cushion.
How much: You need enough to build a prototype
Who: Friends and Family
You’ve built your concept, and it’s working...sort of, enough to take it to Angel investors and pre-seed and seed investors. Getting from concept to working prototype is a huge leap forward. The prototype is incredibly important to getting investors attention. They want to see that you’ve built something – even if its small and only a the minimal viable product.
How much: Enough to fund two-week iteration cycles during your Alpha and beta. Calculate your burn rate and predict it will rise month over month during the beta.
Who: Enough to fund two-week iteration cycles during your Alpha and beta. Calculate your burn rate and predict it will rise month over month during the beta.
You’ve got a working product, one that’s good enough to test with a core group of “super users” who are giving you great feedback. At this stage you should be actively looking and hunting for a seed round that will accelerate growth.
How much: Start thinking beyond burn and begin thinking about user acquisition costs and sales.
Who: Super Angels who are recruiting more Angels in a healthy seed raise.
This stage you’re testing it with a larger group of users and you should be in serious talks with several funds. You have key performance indicators all attached to ROI, you understand how much you need to have runway to last you two years, and you can get a few funds in on a $2-$6 million raise.
How much: This depends on product and user acquisition targets. How fast you want to scale will determine how much you need.
Who: Series A Round of Venture
There are several types of investors, and taking the time to understand who they are and what the profile of one might look like is always helpful before you begin networking to find the right person to take your startup to the next level.
A lot of startups resist pitching friends and family. They are reticent because they fear it will affect their personal relationship. However, this belief needs to change. If you as an entrepreneur really believe in yourself and your business, then you are providing an opportunity to grow their wealth. During the beginning stage of your startup, pitching to wealthy friends and family is the best way to get funding to get your prototype made and hit the ground running. Most smart investors put aside a certain amount of their portfolio (10-20%) for high risk investments, and your startup would be considered “high risk”.
Those who are most willing to take a risk are younger investors who have put aside a bit of cash. This would be late 30’s to early 40’s, and even 50. Typically they’re single and never been married, or happily married and never been through a divorce. These professionals are usually in high income capacity, and have invested in many vehicles – bonds, stocks, IRA’s, and may have dabbled in startups. Look for those who have taken a risk and actually seen some success. Those who have been burned may be somewhat skeptical, but they may have also learned a lesson and want to get back in.
Start with a soft sell. Send your pitch deck and business plan and ask for their opinion, edits, and to forward to any of their “wealthy” friends who may want to invest. If it’s truly a good opportunity they can’t pass up – they’ll let you know with a meeting and a check.
Most of the time when you’re pitching to friends and family, it’s not a huge raise. It should only be enough for a prototype, so its most likely less than $50,000. If it’s more than that, question what you’re trying to build, because you might be building something that’s too advanced. Remember: minimal viable product.
Angels are these elusive investors everyone hears about but no ones seems to know. In entrepreneur’s minds, these are the supermodels of investing. Angel List (www.angel.co) is a directory of individuals who are available and ready to invest, however Angel List is more like the yellow pages and less of a “warm introduction” that early stage entrepreneurs need. These people actually do invest, and invest anywhere between $10k -$1 million and can act almost as a founder.
Angels usually have invested in several start-ups and seen success. Some have chosen to be Angels because they’re high risk, high reward types, others love tech. I’ve met a few that had no other options – they were in accidents and needed to diversify their own investments due to their inability to hold a regular job.
If you get your hands on a Super Angel, consider yourself blessed. These are Angels who actually 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. If you are looking for an Angel, find out how healthy their network is, and try and find a Super Angel. Super Angels typically have had a background in Angel investing and have been successful at it. They’re a bit older, and have a network of friends who are in their 40’s and 50’s who are looking to take on a bit of risk.
These are partners that give you your “institutional” round. They raise a large fund (anywhere from several million to several billion) and give your company a cash infusion to accelerate your growth. Venture Capitalists in the tech industry are typically in San Francisco, New York, Boston, and some consumer and advertising in Los Angeles. Venture Capital firms like to stick to certain verticals or types of startups where they network, can know enough about that industry to make better guesses. Some venture capitalists came from Private Equity, some have entrepreneurial backgrounds themselves, and others worked for large banks in New York as analysts and have transitioned over. Knowing the background of the Venture Managing Partner you’re pitching can be a huge help in knowing if he’s a finance guy, or an entrepreneur.
Investment Bankers raise capital, sometimes for funds, sometimes for wealthy individuals, and sometimes for startups themselves and can act as a matchmaker. These partners search for investors usually for a fee. A typically finders fee is negotiated upfront, and it’s between 5-10%. They must be licensed with a series 6 or 7 license. If a person offers to “fundraise” for you and wants a finders fee and is not licensed, they can only accept a consulting fee and/or equity, otherwise the activity is illegal. Investment Bankers can be good resources because they’ll get you a warm introduction using their network, and do the pitching for you. Most venture capitalists don’t like cold calls from random entrepreneurs.
Crowdfunding is becoming a more popular option for start-ups to prove their concept is popular and solves a problem, and can be used as a marketing tool. Soon the SEC rules will be changing, and individuals will be able to directly purchase shares in startups.
Flash Funding is a new, popular concept started by www.flashfunders.com. This is where start-ups who have a lead investor (typically 20% of the raise) can use the domino effect by posting their pitch deck online with their capital raised, and other investors have the opportunity to jump in for a fixed equity rate. It’s a great way to get extra attention if you already have 10-20% from a lead investor.
It may surprise you to know that investors are searching for innovative start-ups in need of funding. They review the ideas and business plans of many startups each month, which means you need to find a way to make your company stand out from the others.
You could start by taking a look at successful startups to learn what made them get noticed by investors. You could also find out why their company is flourishing and how you can apply some of these practices to your new business venture. Take this information and let potential investors see how your business will give them a profit on their investment.
Seek referrals from everyone - accountants, lawyers, service providers, and peers - for investors who would be interested in your start-up. Always look for a warm introduction. If you go to venture websites, they are specifically saying that they don’t like cold calls, they’re looking to be introduced.
Determine what investors are interested in your industry. Specific investors like your niche. Look at companies who are similar to you but not necessarily your competitors. One questions we always ask is: Who would buy you? An example might be Twitter, Facebook, and Yahoo!. So look at investors who have sold a lot of companies to them, because not only do they have connections at those industry giants, but are interested in companies who are social.
Use Twitter and start a list of VC’s and start engaging with them. Every day watch what they’re talking about. At the end of this e-book we recommend 10 of the top influential investors, however, you should be focused on investors who are interested in investing in your particular niche. See what conferences they are attending or meetups they’re going to.
Use Linkedin to find the investors. See if you have any connections in common. If you don’t, see what groups they’re in and start joining groups that the investors are in. Don’t reach out until you’re ready to make a great pitch.
Make connections to the portfolio of your venture targets. Find the CEO’s and C-suites of all the portfolio of the angels or VC and reach out. Send an email about how great the company is, how you’ve been following and connect.
Active Angels and venture partners are absolutely going to events to find the next big start-up to invest in. It’s crucial to their business to know what’s out there, who could be potential disruptors to their current portfolio, what companies could be potential partners, and who might be the best new start-up to invest in.
As an entrepreneur, it’s important to use your time wisely. You shouldn’t go to every meetup you get invited to. Strategically go to ones that will build your network, not ones crawling with all the wrong people. Here are the events that investors attend and tips to meet them , so you’re not hunting them down:
Start–up Competitions - Get on Stage: Some start-ups avoid the stage thinking that their idea will get stolen if they spend time sharing their business with so many innovators. This is a false belief. Startups are concerned with building their own passion project, and engaged in trying to solve some other problem. Are you going to steal other people’s ideas on stage? Probably not, because you’re dedicated to your own business. Investors notice those who are on stage, they’ve been pre-selected and screened, curated by whoever organized the event, and is most likely a good idea. If you get on stage, you’ll get attention from investors and press.
Conferences - Go VIP: Venture capitalists and angels have the budget to go VIP. You may not as a bootstrapping entrepreneur. Whether it’s contributing to a panel, getting journalist credentials, and/or wheeling and dealing with event organizers, see what you can do to get some sort of pass that gets you into the upper echelon of the events.
Go to Accelerator/Incubator Competitions: Occasionally those seem a little tiring and some startups hate going to those competitions. However, most investors we interviewed for this e-book and ones we’ve worked with admit that they love going to those events and finding the hot new startups. They typically go to the top quality ones, and are always looking for new ones that are churning out big breakouts. When going to these competitions and pitch days, pay attention to the profile of who might be an angel, and do research.
Go to VC Sponsored Events: VC’s host events a few times a year. If you get an email or catch wind of these events – be sure to attend. Surprisingly it tends to be mostly their own portfolio companies and other angels and VC’s. Not a lot of new blood is going around pitching at these, and a few investors told us that the few startups that actually attend, they always follow up with.
You never know who you’ll run into, which means you should always be ready to make an elevator pitch. If aren’t prepared enough to explain and hook investors in a couple of minutes, how do you expect to reach your potential customers? What ‘pain point’ are you trying to solve? Be ready to explain with an interesting, but pointed, anecdote.
Often times we see startups pitching us products that are not in the wheelhouse of the investor, and rather than have a productive conversation about what the investor is looking for, the entrepreneur goes into a long pitch mode, immediately turning the investor off. He sits looking at his email, bored, never to listen again. Rather than leave a bad impression, wouldn’t you like to be the person whose memorable? The first thing a good entrepreneur does is ask about what their investment history is. Make sure that the investor is a good fit before you spend too much time pitching him your company.
We recommend starting with a quick elevator pitch, asking what the investor likes to invest in, and then having a natural conversation about how the two work together if possible. Many times the investor won’t be a good fit - in this case, give the investor highlights of your traction and see who he or she knows that might be a good fit.
Be clear: Use plain language, not a string of “buzzwords”. One of my biggest pet peeves is hearing companies pitch themselves as “big data in the cloud”. This means nothing to most investors, and doesn’t describe what you do.
Identify the problem you’re trying to solve: Let the investor know what the market problem is, and how you plan on solving it. “80% of single people are looking for a partner that has at pet. And with 50 million singles in the US market, that means tens of millions of single people want a partner with a compatible pet situation.”
Be Authentic: Although you should be practicing this pitch, and often, work to make it sound natural, and conversational.
Talk about your traction to get their attention: Let the investor know what you’re doing that’s getting some traction in the market. What’s unique about your value proposition and how fast are you growing? Quick stats that are showing you are moving fast and a cash infusion will help you move even more quickly will surely catch their ear.
Have an end goal: Ask a few questions about what the investor likes to look at in terms of pitches, and gain an email address to follow up with, or a meeting time.
You will discover that investors often work as teams. One reason for this collaboration is the responsibility for a failed investment can be shared. This shared responsibility can create an advantage for you as all the investors in a group may be more willing to take the risk of putting funds into an unproven startup. For example:
Many investors like to provide funding in areas in which they have expertise. This knowledge can help them evaluate the business plan of the start-up and estimate the amount of risk involved in a particular project. Finding investors that are familiar with your product or service can not only increase the chance of getting an initial investment, but can lead to more funding from the investors’ business associates and business contacts.
Credibility is Key: Show such investors that you are knowledgeable in your chosen field of business. Be honest, as someone with expertise in an area may easily be able to tell if you are being truthful. Because investors most likely have some experience in your field, they will certainly know enough to find out how knowledgeable you are with a series of direct questions.
ROI: Convince these investors that they will receive a positive return on their money. Show your potential investors a well-developed business model. Investors typically want to see a well thought out return on investment that includes seeing a return within usually 5 years. They expect five years to scale, so be sure to cover how quickly you can realistically scale in 5-7 years.
Take into account new competitors: One of the key components of a good business model is creating barriers to entry, and expecting new competitors to follow your lead. What have you done to protect your model and keep those copying your model at bay?
Share your secret: Explain how your business is unique and can provide a superior product or service. Typically highlighting your team’s ability to execute and knowing something that your potential or perceived competitors don’t puts you in a unique position.
Let investors know about your business network. Being able to secure a number of significant business contacts demonstrate how well you can handle the social aspect of the business world. If you have a line on distribution, or celebrity friends who can help endorse for a user acquisition strategy, these are all key factors in why your team is positioned to execute flawlessly.
Dedication is vital to the survival of any business. Demonstrate your level of dedication to your investors. They need to know your level of commitment to the start-up as they will not want to fund a startup which they view as just a passing fad to the founder. They want to see that when things go awry, and all investors know that they will, you and your team will stick through it for the long haul.
Seek investors who are familiar with your field of business. Investors who have an understanding of the market for a given product or service are more likely to provide funding for a startup they feel has a good chance of succeeding in the current and future marketplace.
Investors look for some common characteristic in start-ups that are seeking funding. These important factors can mean different things to each investor. To show your communication skills, always ask an investor how they would describe each of the following, and see if you do, or can, fit the bill.
The co-founders all may be great, but if the team around you isn’t A plus, you may have a problem. Everyone has to be an all star. Build a good team in your business. You may have a fantastic business idea but if you do not have the team in place to make the business work, investors are more likely to deny your funding request. Show the investors how well your team works together and how they have the expertise in your given field to help build and sustain a successful business.
Different investors define a “good team” in multiple ways. Some firms like to find teams who are MBA’s from specific business schools who come from large corporations that the partners worked at. Other’s like founders that went through accelerator programs like Y-Combinator, and tend to consistently look for new startups with that experience. If you don’t have that background, never fear. Plenty of investors were honest about teams showing tenacity, industry knowledge, and a deep understanding of the market and market problem being enough for them to invest in.
The co-founders all may be great, but if the team around you isn’t A plus, you may have a problem. Everyone has to be an all star. Build a good team in your business. You may have a fantastic business idea but if you do not have the team in place to make the business work, investors are more likely to deny your funding request. Show the investors how well your team works together and how they have the expertise in your given field to help build and sustain a successful business.
Seek investors who are familiar with your field of business. Investors who have an understanding of the market for a given product or service are more likely to provide funding for a start-up they feel has a good chance of succeeding in the current and future marketplace.
Choosing smart money vs. dumb money helps you in the long run. Smart money are people who know about the market and investing in startups and will relax when things start going south, and understand at some point, there will be problems. They comprehend the nature of bumps in the road. They’re wise and can act as a guide, coach, and mentor. Dumb money will react emotionally and guide you down the wrong path. They’re more interested in recouping their loss than looking at the big picture, forcing you to make mistakes in order to please them. Don’t be desperate for dumb money after the friends and family round.
Investors will want to see startups that have the proper technology to deliver the product or service. Demonstrate that your start-up has all the tools needed to become a successful, profitable company. This usually happens in the second meeting, where you can show off analytics dashboards, demos of the product, back end resources, etc.
This is also why it’s important to have a prototype. Building one shows your investors that you have the ability to create something, and they can start using it and seeing how “sticky” it is and why it would gain traction. Ideas are great, but products are better.
Having an in-house CTO that is always available to address issues with products or services is something investors often look for in a start-up. Even if you are outsourcing to another engineering company or offshore, having a technical lead that has credibility is crucial. Most investors will feel comforted by the architect having a record of skill.
This is becoming increasingly important. Investors typically like something that’s: a. Predictable, and b. Scalable. Investors are no longer paying for users, they want to know that the business can create some sort of revenue model that will bring in multiple streams, and they want to know that the entrepreneur is familiar enough with the space to recognize opportunities.
Showing that you understand your business model and can make adjustments when appropriate is helpful. Investors tend to love SaaS companies because they have a monthly fee and the more customers one has at that price point, the more the investor can predict the revenue.
Performance based pricing schedules are more complex, and harder for investors to wrap their heads around. Showing that when customers scale, your business scales is a great model for getting in new clients... but the math becomes incredibly complex, and the revenue predictability starts to become more difficult for the investor to comprehend.
Showing that you’re flexible and willing to take suggestions if the model isn’t working for your investor is crucial. They will always think of something you missed, and hopefully be able to point you in the right direction.
Let investors know about your business network. Being able to secure a number of significant business contacts demonstrate how well you can handle the social aspect of the business world. Networking involves being able to communicate well verbally and in written form. Your communication skills will be a valuable asset when making presentations to potential investors.
Investors are also interested in knowing if you have direct access to potential clients, referrals, distribution networks or anyone that’s going to bring users, sales, and revenue sources directly to your product. If you are six months out from moving towards seeking investment, we suggest bringing someone in as a partner or an advisory board member who has these connections for a low equity percentage.
The ability to sell your business concept is another talent that can draw investors to your company. Your may have a fantastic, innovative product or service, but no one will know of it unless your team has good selling skills.
Investors don’t want to see that you have one or two potential buyers. Most investors want at least 7 potential targets who would buy the business for strategic purposes. Most of the money is made in the mergers and acquisition side, when a giant engulfs the start-up. These large conglomerates will overpay for your startup for a myriad of reasons, and savvy investors are familiar with the triggers that will push these companies to buy your start-up at a steep price.
Investor relations go along with sales. A team member skilled in working with investors can keep the money flowing. They can also build a good rapport with current investors and subsequently, enhance your company’s reputation in the business community.
Investors seek companies with a demonstrated ability to adapt to changing business environments. A change may have to occur over time or may be a sudden adaptation needed in a more dire situation. Investors want to know of problems your company may have faced and how your team came together to adapt and overcome the problem.
Be sure to show results in making the cash register ring – show that you have preliminary numbers proving that there’s traction in your business model. It also shows that you may not need a future round, which means they are less likely to be diluted or hurt in a potential down round.
The founder of a start-up must know the market in which they intend to conduct business. This research should include the past trends, the current atmosphere and the future prospective. You can learn about from the failure of others in similar businesses in past market environment. Discover if these failures were caused by the economic environment. If they were, look at businesses the survived the economic downturn and how they accomplished this task. If a business failed because of their own actions, learn from their mistakes.
Know the current market situation for the business you intend to open. Be prepared to explain to potential investors how your company fits in the current economic climate and what will set you apart from your competitors. Be realistic about how fast you expect your company to grow so as not to mislead investors. Know the current technological innovations and explain your mastery to investors.
You also need to learn to make calculated predictions about future trends in your market. Estimate where the market is going and how your startup can succeed or adapt to sudden changes in the business climate. Demonstrate your understanding of the importance of adaptability to new technology and situations. To understand your market typically takes 6 weeks of focused research. This research will yield incredible results in showing your investors why the market is ripe for your product. You might be surprised in some of the results when researching the market, and will be able to make a more powerful presentation. Your market research should focus on:
Entrepreneur and investor Tim Berry adds the following tips on Entrepreneur :
Shop your competition: Visit their office and purchase their products or services so you can look over their price lists, see how many customers enter their building, and hear their sales pitch.
Talk to their customers: Ask their customers what they like/dislike about your competitors.
Visit their websites: Study their site closely to see what they’re emphasizing, charging for products/services, or where they’re selling their products/services.
Purchase credit and background reports: Visit Dun and Bradstreet’s website (www.dnb.com).
Purchase mailing lists and directories: Go to the economic census at www.census.gov for lists of businesses per county in the United States.
Search online: See where you and your competitors end up online
What is their overall revenue strategy?
What are their key KPI’s and how fast can you scale and reach those similar KPI’s?
What is their user acquisition strategy?
Complete a SWOT analysis on each major competitor.
During the process of working and pitching investors, they need to know that your company is making progress. Show them you have faced challenges and acted quickly to overcome these difficulties. Show how your business has grown in its brief existence and has the ability to meet project deadlines. Investors often measure a company’s ability to make progress by taking note of how well the start-up took action to address issues brought to their attention.
Media attention can demonstrate that your startup is getting noticed by the press. It demonstrates the media has noticed the progress your business has made and feel your story is of interest to their audience. Media attention can capture the attention of investors and help your startup grow even more. Investors are often people or groups of people who believe in taking action and getting things done. They have ambition, dedication, and passion for the work they do. They seek startup founders who exhibit these same personality traits and will more likely choose to invest their money in their start-up. By investing with such a dynamic company, investors hope to not only make profits, but to get a rapid return on their funds. In order to grow, you need to capitalize on this desire.
Starting a business venture can be an extremely stressful time. Founders may risk life savings, homes, and family life to make their dream of a successful business ownership a reality. Although it may be difficult at times, you must exude confidence when meeting with investors. Let them see that you firmly believe in your business and are invested yourself.
Investors often act upon referrals. If they learn of associates providing funds to a promising start-up, they are more likely to investigate and become financially involved. Known investors get a tremendous amounts of request for startup funds. Seeking referrals from other investors helps with sort through these requests.
Being introduced to new potential through present investors can help you build a business network. Since investors often invest in market areas where they have knowledge, building professional relationships with these people can also bring customers to your company. Having investors in your business network can allow a business relationship to develop and grow stronger before you approach them for funding.
If you correctly did your homework on your competitors, you should know who invested, and perhaps who almost invested in your closest competitors. Angel List and Crunchbase are great places to start and to look at companies who are similar and see who invested.
Go where the Investors Are: Meet investors at trade shows, conferences, and meeting of local business groups. You can also seek out other startup founders, government officials, and owners of successful, established business. Become comfortable speaking with random people at these events - these people have their own connections and one brief conversation may lead to more investors and business growth. If you are talking to a potential investor, be sincere but play up to their ego. If you browse meetup.com, you’ll notice that there are angel groups, and people who are “angel investors” who are attending specific meetups. Do your homework on these people before you attend and see if they are legitimate. For those who actually are, reach out to them before the event and see if you can approach them and speak to them when they are there at a specific time and send them information about your company before hand.
Make a Memorable Impression: Investors attend a great number of meetings. After some time the material presented may blend together. This is why your presentation must create an almost instant impression on the investors. Grab their attention in the first 30 seconds and convince them that investing in your company will be one of the wisest, most profitable business decisions they may make. You believe in your startup. Use the initial meeting to make them believe in your company also.
Do not rely solely on technology such as PowerPoint presentations to convey your message. Add personal touches of conversation to you strategy. Have a conversation with the investors. Make sure they leave with a positive impression of you and your startup. After the meeting, send a note thanking them for their time and consideration. Even if they do not invest themselves, they may give you a referral.
Learn to evaluate the worth of your business. Much of this estimated worth is based on what others think of your business and this factor may impact the amount of funding you may receive. Being valued too high may make investors think you do not need funding. Having a value too low may give the impression that your business will not be deemed potentially profitable.
Valuations for the majority of startups are “illusionary”. They cannot be based on profits and earnings, therefore a number of different formulas have been created to guide start-ups in determining what their valuation might be.
Several factors go into illusionary valuation models:
Experience of team: The experience of the team is typically weighted the highest, as its the #1 predictor if the startup will fail or thrive. Most of the models take into consideration the titles at former companies and the total years of experience.
Revenue strategies: The revenue streams and options also are taken into account. The more predictable revenue streams, the higher the valuation.
Stage: The closer you are to a working beta being tested on users, the better. Even a working prototype puts your business in a better position.
Market Size: How many potential customers and customers that can convert quickly to allow to business to scale will prove a higher valuation. The growth of the market will also make a difference. The higher the TAM, the better the valuation.
Customer understanding and traction: If you know your market well, have identified a problem, and have proof that they need your product through traction or questionnaires, the more it shows that you are validated in the marketplace.
Location of business: Where a startup is located may affect its valuation number.
Strategic Partnerships: If you already have a network of customers or distributors, your valuation will most likely be higher.
Cayenne Consulting Calculator: Your startup can use this calculator to determine a valuation. It’s important however, that you’re incredibly honest with some of the questions. Entrepreneurs who don’t know their market well can perform too high on this calculator.
EquityNet: They’ve created another calculator in order to help start-ups on their crowdfunding platform.
Scorecard Valuation: This calculation was created for angel investors to create a better outcome, but still has qualitative variables that can be adjusted in favor of the investor or co-founders. This method is particularly favorable to those with strong teams and large market opportunities.
The Berkus Method: This one is fairly simple and looks at 5 factors, giving the startup up to $500k for each, capping the start-up at $2.5 million.
The Venture Capital Method: This method takes into account the terminal value (value of when you sell), and anticipated ROI.
Risk Factor Summation Method: This method was created by Ohio Angel investors so they could better manage their offers in a fair and equitable way. It uses a scale, and rates the start-up on 12 points.
Each one of these methods will yield different results. The best way for a startup to negotiate the best fair price is to use 2-3 of these methods, and use the mean of all 3 to determine a price. This can be negotiated with the venture firm or angel who most likely will have their own methodology or standard.
Choose the three that favor your start-up the most, and then you can show the investor that you’ve done your research, and based on best practices, you believe you’ve calculated a fair price. For example, if you have a spectacular team, choose the Scorecard method, The Berkus Method, and Risk Summation Method, and then combine and divide by 3.
Some start-ups who have less experience start looking at competitors or similar businesses and think that their valuation should be as high or higher based on projected revenues. I’ve heard founders claim that their idea is worth $25 million and want to sell it at that price when they have yet to even launch. This type of thinking will put the entrepreneur at risk. Startups pre-money valuation before a large Angel or VC infusion is typically less than $3 million. There are cases where startups raise millions on a team alone, however, it’s incredibly rare, and it’s usually when they’ve secured valuable IP (think mobile gaming).
We’ve seen one company alone pitch over 25 angels and funds with an inflated valuation and get turned down, the overwhelming feedback was that if they over valued themselves to such an overwhelming extent, their revenue models must be flawed, or the founders are incompetent. Investors scattered after looking at the overprojected financials, and once they took the advice to fix the valuation, they started seeing some term sheets.
Starting a business is often the fulfillment of a lifelong dream. What begins as an idea for a product or service can evolve into successful company which generates income for owners, employees and investors. This transformation requires hard work, dedication, and careful financial planning.
A new business requires equity to get started, and company founders have a number of decisions to make regarding these initial investments. Owners must decide how much capital they need and how these funds are to be used. They also must decide the most suitable capital structure for the company.
There are several options:
Founders must determine who owns shares and how they are to be issued. A subscription agreement should be prepared that lists the number of shares sold and their price. They may offer stock options to their first employees in exchange for working for lower wages. Advisors and services providers can be extremely helpful to a new business and may often accept equity in exchange for their work.
A founder must select the business structure best suited for their company while being mindful that the structure may change as the company grows. Legal advice can be of great assistance in making this choice.
An equity investor can play a vital role in the growth of a business. The funding they provide can transform an idea into a thriving enterprise. However, there are issues founders must be aware of when entering agreements with investors. An equity investor is essentially buying a portion of the company. They realize the risk of investing in a new company, and may request a higher percentage of profits to compensate for a possible loss of investment. Such an investor can transform your company into a general partnership by default, but they will subsequently share in the liabilities of the business. Their experience in the business world can be a great source of information and advice.
Here is a quick list of the benefits and risks of equity investors:
Essentially, you lose control but gain profits Every time someone invests in a company, the founders lose some level of control of their business. But investors are vital to a company’s growth and wise owners will take action such as issuing common stock in option pools to encourage more investment.
A co-founder may work for equity in the company in exchange for a salary. Private investors are given a percentage of the company based on the amount of cash they contribute. The angel and venture capital rounds of investing can help a company grow tremendously and may lead to an initial public offering of stock. Investment bankers will sell shares of the company on the stock market in exchange for 7 percent of the funds they raise.
Startups in the early stages of financing have many options - bootstrapping, borrowing money from friends/family or taking out a personal loan - but what other options do you have when you start to need more funding? One of the more common options would be through a convertible note.
Scott Edward Walker defines a convertible note on TechCrunch as a “short-term debt that converts into equity” which are typically used for seed rounds. Walker further explains that “investors loan money to a startup as its first round of funding; and then rather than get their money back with interest, the investors receive shares of preferred stock as part of the startup’s initial preferred stock financing, based on the terms of the note.”
In a way, you can think of a convertible note as a hybrid: part debt and part equity. It acts as a debt until it converts into equity. This means it is structured as loan, but is automatically converted to equity to pay off the remaining balance.
One of the main reasons a startup would consider using a convertible note is it delays the valuation of the company until a later founding round or milestone. In other words, it helps buy additional time for the difficult decision of figuring out much a startup is actually worth. For example, how can you put a price tag on a prototype and a pair of engineers? How would that value change when if the team added a MBA?
At this stage in your funding, a valuation may not be necessary. If you do, however, need a loan, a convertible note can help achieve funding without worrying about the value until you have customers - which will ultimately be used to figure out how much your company is worth.
When an investor funds a startup through a convertible note, the money is received immediately. However, the amount of shares the investor is entitled to is not determined until the next round of funding. At this time the investors review the company and determine a fair price on shares.
The determination on the amount of equity that a note converts is based on the price of the A round along with the following two components: discount rate and valuation cap.
Discount Rate: This is used to reward investors for taking a risk on your startup by giving the investors the right to convert the amount of the loan, as well as interest at a reduced price. For example, an investor could receive a 20% discount rate. This means that if shares were sold at $1.00 apiece, the note holder could purchase them at $0.80 per share.
Valuation Cap: This is another way to reward investors by setting the maximum price the loan will convert into equity. This is usually done by dividing the valuation cap by the series valuation. For example, if a company is valued at $6 million with $1 shares, and the investor has a note with a $3 million cap, the note will convert into equity as if the value of the company was $3 million. This means that the investor would end up paying $0.50/share.
The investor uses both the discount rate and valuation rates to see which deal is better financially for them.
Two other considerations are:
Interest Rate: Because this is a loan, convertible notes have an interest rate, usually 4%-8% per year. How ever, with a convertible note the interest rate is paid with additional shares instead of cash.
Maturity Date: This is the date when the entrepreneur must pay back loan.
Besides solving valuation concerns, convertible notes can also avoid startup owners from facing tricky tax problems. The other perks of convertible notes include:
Fast and cheap: A convertible note round could close in a couple of days with just a 2-3 page promissory note, which would only cost around $1,500-$2,000 in legal fees.
Interest payments do not have to be paid back in cash. Perhaps the biggest concern with convertible notes may be the fact that there is a limited time frame to pay it back or convert into equity.
There are two common ways to fund your small business; debt and equity financing.
Debt Financing: This is when you borrow money from a financial institution by having good credit or putting up collateral.
Equity Financing: In this situation, you bring in investors or partners to provide capital. In exchange, they’ll receive a share of the company.
Regardless of how you secure funding, there comes a time when your startup will accumulate both debt and equity. When this occurs, you’ll have to look into the debt equity ratio of your startup.
One of the cleanest definition of debt equity is from Investopedia :
“A measure of a company’s financial leverage calculated by dividing its total liabilities & stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.”
While there are many formulas to determine your debt-to-equity, here are three of the most common formulas:
In these circumstances, the debt would consist of the book or market value of interest-bearing financial liabilities. Examples would include:
Equity would be the book value of share capital and reserves. This would be found in the equity section of the balance sheet or the market capitalization.
Here are examples of how this process work using the above formulas:
In these scenarios, an investor would be interested in the business because the debt to equity is low - usually below 50% is desirable.
The reason debt/equity ratio is so important for investors is because the more outstanding debt a company has, the more earnings will be used to make payments on the interest and principal. When this happens, it will reduce the amount of capital available to grow, conduct research, develop a marketing plan, or even pay dividends to its shareholders.
Debt equity is also important because when a business takes on debt, it is committed to making fixed payments, which usually occurs twice a year. If the business has an off year, it may not accumulate enough cash flow to cover expenses, such as the interest payments. In which case, the business may have to consider selling an asset, raising more money, or declaring bankruptcy.
Keep in mind, however, that a higher debt-equity ratio isn’t necessarily a bad thing since debt happens to be a cheaper source of finance when compared to equity. The reason for this is because of tax savings, dividends are not tax-deductible. In fact, it may even benefit a company to be at an acceptable financial risk since it replaces the equity, which is expensive, with debt, which isn’t as expensive. This actually can lead to shareholder wealth.
Other ways to fund your business would be through venture debt, equity, and convertible notes. George Deeb thoroughly compared these three options in Forbes and here’s a brief synopsis of each:
Venture Debt: If you have an existing product or an established track record, this is an appealing option since they are senior secured loans from aggressive banks like Silicon Valley Bank. These loans are repaid before all other loans. Because the loan is secured by the businesses’ assets, you keep 100% control of your business. If you’re not able to pay back the loan, the bank can force you to liquidate.
Equity: This is one of the most common ways to secure funding, which is usually from angel investors or venture capital firms. In exchange for the investment, investors usually want 25% to 35% of the company. They’ll also be looking for preferred stock - this is where they’ll get 6% to 8% interest and a liquidation preference. The main advantage of using equity is that it doesn’t have to be paid back like with loans, however you will have to give up some control of the company.
Convertible Notes: As discussed earlier, convertible notes are part debt, part equity. It allows you to quickly borrow money from investors by offering equity in the company. This type of funding usually takes place in the early stages of a company.
In addition to the speed of obtaining this type of loan, it can happen within a couple of days, it is also cheaper than issuing equity, there are no monthly payments, and it keeps control of the company intact until valuation. Just be mindful of the time frame.
There are many ways for your to structure your pitch deck. Chance Barnett shares a format of what his pitch decks would look like on Forbes which includes 11 slides.
Slide 1: Vision / Elevator Pitch
Slide 2: Traction / Validation
Slide 3: Market Opportunity
Slide 4: The Problem
Slide 5: Product / Service
Slide 6: Revenue Model
Slide 7: Marketing & Growth Strategy
Slide 8: Team
Slide 9: Financials
Slide 10: Competition
Slide 11: Investment ‘Ask’
Barnett adds you can include additional slides, such as exit strategy or examples of product demos, and advises including the most important numbers in the beginning of the deck. Documents, like an executive summary or technical details, should be left off the deck - investors can look over them if they chose after the presentation.
One of the most popular pitch deck templates comes from Guy Kawasaki’s book The Art of the Start. In the book, Kawasaki states that pitch decks should follow the “10/20/30 rule of PowerPoint.” This rule argues pitch decks should include 10 slides, take 20 minutes to present, and use text that is no smaller than 30 font.
The reasoning behind the “10/20/30 rule of PowerPoint” is as follows:
Ten slides: Kawasaki argues humans can not comprehend more than ten Powerpoint slides.
Twenty minutes: Explain your slides in twenty minutes, even if you have an hour slot. It takes time to set up and people could arrive late. Also, it leaves plenty of time for discussion.
Thirty-point font: By using larger font, you’re forced to know the most important points without relying on text.
Here’s an example of how this pitch deck would appear:
Title: This needs to include your name, name of business, and contact information.
Problem/Opportunity: Detail the ‘pain’ your customers are experiencing that you will alleviate.
Value Proposition: Explain the value of the pain that you’re alleviating.
Underlying magic: Illustrate what makes your product unique, such as technology, through flowcharts, diagrams, or prototypes.
Business model: Show how your business will make a profit.
Marketing and sales: Show how you are working to get the word out.
Competitive Analysis: How are you better than your competitors?
Management team: Often, investors invest in teams more so than ideas. Highlight how your management team sets your company apart.
Financial projections and key metrics: Include a forecast for the next 3-5 years that show ,key metrics (customers, conversion rates).
Current status, accomplishments to date, timeline and use of funds: Where are you at now, and what will you do with their money?
The best part about this template is it can also be used when presenting your business to potential partners or clients.
Remember, the point of a pitch deck is to hook potential investors. To accomplish that, your pitch deck needs to do the following:
A couple of other pointers to consider when constructing your pitch deck:
Here are five examples of successful pitch decks that you can review when structuring your very own deck:
Most likely if your deck makes it into the hands of the associates and partners of the firm, each decision making member of the firm is looking at 30-50 decks a week if they have a healthy fund. Perhaps 25% will be passed on amongst the members of the team, while 75% will be tossed out, and won’t get a meeting.
Typically if your deck is flagged by one of the associates as being an interesting opportunity, it will be passed amongst all the Partners to determine if they’re interested in a meeting. Occasionally, if you’ve followed some of the tips from this book, you’ll get a warm intro and perhaps the investor is excited enough to skip this step.
The investors often see so many pitch decks that yours may not be as memorable as you think. Keep in mind how many decks they’re seeing, and realize they may need a refresher. Also remember that they may get notified that you seem like a great business – but they are too busy to look at the deck and trust their associate. Be sure to ask in the meeting if they saw the deck, don’t assume they saw or remember it.
The objective of your pitch meeting is to get another meeting with all the partners and your whole team, where you can do a deep dive and a brainstorming session, and win over all the partners. A typical first pitch should be one co-founder, perhaps two, and one partner and most likely an associate. Although we are writing about venture, use this process with an Angel, and treat an angle similar to a firm.
Create a mind map of the agenda: The biggest mistake that entrepreneurs make is spending too much time emotionally conveying vision, and not even getting to their deck. Investors are not interested in the tiny details of why you started your business. Create a 45-60 minute agenda:
Do your research on the investor: What’s his/her background? What does their portfolio look like? Are they more finance oriented or more entrepreneurial? Knowing the answers to these questions will help you tailor your pitch to the investors hot buttons. Whether you like it or not, you are selling yourself and your business.
Script your pitch: It’s very easy to want to wing it, especially when you know your business better than anybody. But that’s even more reason to script your pitch. Most founders have a tendency to go down a rabbit hole about something that the investor is interested in but you think is very interesting. One example is the vision and passion for the business. Many founders will spend far too much time on this area, missing the important factors that investors base their decisions on. Script it based on what you know the investor will love.
Practice the Pitch: You may not have the time with your busy schedule of running the business, but this is going to be what grows your company. Investors are looking for a CEO who knows how to pitch – whether it be to potential partners, press, customers, or for you series B to even bigger venture firms.
Start with your personal elevator pitch: This is not your company elevator pitch, but a personal one, introducing yourself. Make this very concise, but add some credibility factors in there. Credibility is very important to investors as they want to know you’re a person who has a solid work history and is accomplished, connected, and will execute the plan you’re going to deliver.
Start with Vision: Have an incredibly clear vision statement that comes from the heart. Keep this short and to the point. This is where we’ve seen most entrepreneurs get lost. Because this is where they feel they are the most strong in their pitch, they go on a tangent. If you script anything, script this portion and have this down pat. Make sure your vision includes a short elevator pitch about what the business actually is, and why you started it. The partner needs to understand what you’re doing and needs a refresher. These guys see 30 pitch decks a week, and several pitches a week, and may not have looked at who you are before the meeting.
Walk through the deck: The Partner may have not even seen it, most likely the associate gave the deck a thumbs up and ran the financials, and the Partner agreed to the meeting. He or she may have no idea what your business even is. The assumption that they already have been through your deck and understand everything is a mistake. Ask how much they remember, and if nothing - Walk through it again and expand on everything. If the investor does remember the deck quite well, stay on script but ask if there’s any areas he or she would like to expand on during the pitch. Watch for areas the investor gets excited about. For instance, you may go through revenue models and the investor knows that one is going to have more traction over the others. This is where you should spend more of your time, and focus on traction on that particular revenue stream.
Q&A: During the question and answer period is where the co-founders should be confident when their assumptions are about to get challenged. These are seasoned professionals who most likely know about your industry and revenue model, so they will definitely have questions that you should be ready for. It’s critical that you do not get defensive or upset if they don’t follow your logic on some of your assumptions. Consider questions flattery that they are interested enough to continue probing into the business.
Closing the meeting: Some of the following questions can be asked to the partners to gauge interest:
Follow Up: The objective of the first meeting is to get a second meeting, a meeting where you can bring both your teams and see if it’s going to be a good fit. When at the meeting, make sure you spend a little time with the associate who did the deal and ask if you can send a follow up email. In this email you’ll: thank them for the meeting, ask for feedback, ask for a date and time for a second meeting.
You can pitch hundreds of investors, but if you can’t close the deal, you’ll find yourself wasting a lot of time. There’s an art to closing that can include introductions to new investors, invitations to future events, and receiving an actual term sheet.
There’s a chance that you will be receiving a pass. If the VC passes, there are a couple routes you can take:
Ask for feedback: Where did you fall short? Where did the deal go wrong? Hopefully the associate or partner will give you an honest answer. If the answer is legitimate, there’s a possibility with a few changes you can come back with better results. For example, if you need more traction, ask how many more customers you’d need, or where your KPI’s should fall at in order to gain their future interest. Some will be pretty straightforward, so be sure to keep the investors in the loop with all progress.
Ask for Referrals: If the problem is a portfolio, market, or deal fit, there’s a possibility they know another investor or firm who may be interested. Perhaps they aren’t familiar with your niche or consider your business too “high risk”. Maybe you’re too much of a “seed” round and they want to invest in larger series A growth rounds. In either case, ask for a referral for someone who might be a better fit for the stage or vertical you’re business is in.
Timing: It also could be a timing issue. Perhaps they are still raising a fund and haven’t closed yet, or are about to raise another fund. Knowing their fundraising schedule could give you another opportunity in several months when they are in a place to take on more risk, or have the appropriate funds to invest in your company.
If the feedback is that they would like a second meeting, it’s best to move forward as soon as possible, and go into the deep dive.
Prepare: Ask the investor what they’re interested in seeing more of at the meeting. Where are their areas of interest? Where do they want to do a deeper dive? Use this opportunity also to find out where you might have some weak spots or where they have doubts. If you became aligned with the associate through the process, ask for his unedited feedback as to
where you think you should focus based on the Partner’s comments after the meeting.
Second Deck: Create a second deck that covers any and all questions that may arise in the Q&A meeting. This second deck will have marketing materials, wireframes, anything that the VC wants to cover during the “deeper dive”. If the VC asks a question, you can easily pull up the information and show them that you’re both prepared, and have something available to see. Note: This is not a second pitch deck. This is an ancillary deck with materials you should already have and be able to throw together.
Attendees: This meeting is one where it’s expected to bring your CTO, co-founders, and even possibly a super angel, anyone who’s a high level executive and would bring clout to the meeting. At this meeting, you’ll want to defer to their expertise and show that you have a well rounded team that are as smart and dedicated as you once claimed in your first meeting. Some founders will not allow their team to speak during meetings, and try and take control of the entire meeting. Before the meeting, be sure to let each team member know what’s expected of him or her, and what areas you’d like them to be ready to speak on.
Agenda: Once again, have a mind map of what needs to be accomplished in the meeting, and make sure that it’s covered in an agenda. Some VC’s would prefer a structured agenda, others expect that all meetings are pretty similar and don’t feel you need one. If you’re not sure, ask if they’d like an agenda. Most west coast VC’s are pretty informal, especially in the early stage funds.
Live Demo: Most VC’s expressed to us that they’re interested in live demos of both their product and of the tools that they are using to show KPI’s and analytics of users. The more you can show your product is sticky using real-time data, the better.
Brainstorming: The brainstorming will be the most important aspect of this meeting. When the investor starts owning the project and getting really excited about it, building features, talking about marketing and who would use it, and recognizing new markets, that’s when you know that the investor is starting to become invested psychologically with the project.
Closing: When they are done getting excited, ask realistically if they think you’ve asked for the right amount of money. Start getting them to talk about what kind of money you’ll need, and if they want to “lead the round”, be the sole investors, or if they think you’ll need a bigger round to scale quickly. Start using this time to get their input on the finance side, that’s their strength. Take the feedback and start learning.
After you’ve pitched, had a great brainstorming session, and you feel the investor seems personally invested in the idea, this is the perfect time to ask for the following:
Timeframe: How soon can they offer you a term sheet? If the investor has a large fund that still has plenty to release, it should be sooner or later. If they’re raising a fund, you may have the dance of waiting until their fund closes. They may want to wait a few months as a strategy as well to get a better deal or see if you progress in your KPI’s. This isn’t the best position for your startup. If the timeframe seems too far off, put together some time sensitive triggers that will get them moving faster.
Outstanding issues: Be sure to ask the investor if there’s anything that would hold him or her back from moving forward with the funding. Hopefully you covered everything during the second meeting, but if there’s anything you missed, you need to address it.
How much: Ask the investor how interested he or she is in the venture, and how much they want to invest. If they are truly interested, they will have an honest conversation about your valuation and their offer.
Term Sheet: the final step is always a term sheet, in which the investors will put together an “offer” of what they’re willing to give and get. Term sheets can have a few landmines, but once you get to the sheet, you know you have a highly interested investor.
Zero to One, Peter Thiel: Reading Thiel’s personal manifesto on both business and politics will give you insight to how investors think, how they believe startups should build, differentiate themselves, and how to strategize to “disrupt” a market by serving an underserved market and scaling from there.
The Happy Start-up (http://www.thehappystartupschool.com/ebook) – this free ebook is a helpful guide on building great teams (and how to attract them), as well as putting together a simple strategy that will help you pitch investors.
What Every Angel Investor Wants You to Know: Brian Cohen teaches startups how to work with Angels, and how to get the most out of the relationship.
The Fundraising Rules: Mark Peter Davis has put together a practical guide for the entire startup process.
Pitching Hacks: How to Pitch to Investors (http://venturehacks.com/pitching ): This is a great e-book that defines things like “traction”, how to get introductions, how to create a “high concept pitch”, and concrete advice on business plans and decks.
Venture Deals: Be Smarter than Your Lawyer and your Venture
Capitalist: This guide by Brad Feld is a must read when you’re in the final stages of negotiation with a VC or Angel.
Hooked: How to Build Habit Forming Products: Nir Eyal outlines exactly how to create the “traction” that all investors are looking for. If you’re curious as to what you need for traction - read this book.
Traction: A Startup Guide to Getting Customers: Another blueprint on how to produce traction for your product, as well as communicate it effectively to your investors and understand what they’re looking for in a successful startup.
Startup Seed Funding for the Rest of Us: A book written by founders outside of Silicon Valley that provides extremely helpful and relevant information, especially for those outside of Nor Cal.
The Art of Start 2.0: The Time Tested Battle-Hardened Guide for Anyone Starting Anything: Guy Kawasaki lends his wisdom to startups, and covers advice on what investors are looking for - a strong team, traction, and the competitive landscape.
The Membership Economy: Find Your Superusers, Master the Forever Transaction, and Build Recurring Revenue: This is a great guide to unlocking the code to building revenue streams, and choosing the right revenue stream for your business. As investors are looking for a startup who understands revenue generation, and can execute flawlessly.
The Startup Owners Manual: The Step By Step Guide for Building a Great Company: Great tips on how to iterate with focus on the customer and build a successful startup.
What will You Present to An Angel Investor Your First Meeting - (http://www.venturegiant.com/news-channel-340-what-will-you-present-to-an-angel-investor-in-your-first-meeting.aspx)
12 Things to know About Raising Money From Angel Investors (http://thenextweb.com/entrepreneur/2014/08/29/12-things-know-raising-money-angel-investors/)
10 Tips to Find the Right Angel Investor For your Startup (http://upstart.bizjournals.com/resources/advice/2014/12/02/mark-mcdonald-appster-angel-investors.html?page=all)
Raising Money From Angel InvestorsHow Start-up Valuation Works (http://anentrepreneuriallife.com/raising-money-from-angel-investors/)
A Founder Friendly Term Sheet (http://blog.samaltman.com/a-founder-friendly-term-sheet)
Papering the Deal: The Basics of Term Sheets (http://www.andrewskurth.com/media/pressroom/797_Doc_ID_3035_8120051628957.pdf)
Funders and Founders (http://fundersandfounders.com): This site uses infographics to explain some of the complex concepts of investing to start-ups. With infographics on how much to raise, how to scale, and salary guides, there’s plenty of easy to consume information that’s useful during a start-ups fundraising journey.
Entrepreneurship.org (http://www.entrepreneurship.org): Kauffman Foundation built a site to help entrepreneur’s with resources.
Pandodaily (http://pando.com): Started by Techcrunch writer Sarah Lacey, Pando is a blog about all things silicon valley start-ups.
Both Sides of the Table (http://pando.com): Mark Suster gives practical advice to startups about what its like to be an entrepreneur, and how to navigate through the difficulties of building a business, how to better your startup to be positioned to seek money for your startup.
AllBusiness.com (http://www.allbusiness.com) : This is a great blog for small business resources such as marketing and PR resources.
Investopedia (http://www.investopedia.com): Sometimes you need a quick reference to a term, acronym, or word that you may not know, and investopedia is a great place to get it.
Guy Kawasaki (http://guykawasaki.com/blog): Guy shares tips from “How to be a Demo God” to the flow of your pitch deck (shared earlier in this book). Guy has such an amazing background that lends to creating simple and easy to use products and pitches, and angel invests in a lot of successful and well-known startups. He has an eye for a good company, and great advice.
Blog Maverick (http://blogmaverick.com): Mark Cuban loves sharing his start-up and investing advice, and as one of the leaders
On Startups (http://onstartups.com): This online community allows founders to band together and share advice.
500 Startups (http://www.500.co/blog): The blog for the accelerator that has launched many startups, 10 which have led to acquisitions. There’s a lot of helpful advice, plus some free resources for start-ups.
Startup Junkies (http://startupjunkies.com): Have great advice on how to valuate your company.
Many angel investors and venture partners use twitter rather than a blog, so following these investors on Twitter will help you see their perspective, and give you access to resources and conferences they are attending:
Jason Calacanis: @Jason was one of the first investors in Uber. As the Founder of Launch Fest, one of the premier events for both startups and early stage investors, one could say he’s both an industry luminary and a must-follow on twitter. He gives sage wisdom on the platform, keeps his followers abreast on industry trends, and infuses both insight, humor, and incredible honesty into his feed.
How Jason invests: I’m barbelling my portfolio between bonds/cash/blue-chip stocks on one side and startups run by resilient people with tremendous work ethic and skills on the other. Those startups need to have appropriate valuations as well, which means the angel round should be $2.5-5m. That lets angels own 1% for 25-50k, which means if you hit a 100x or 200x return after 50 investments, you’re good.
Biz Stone: @biz is a the co-founder of Twitter and has invested in projects such as Square, Nest Labs, Beyond Meat, and is the CEO of Jelly Industries. In his twitter account he shares a lot of creativity, and other ventures, including some of his non-profit organizations.
Biz Stone on Creation: Creativity is a renewable resource. Challenge yourself every day. Be as creative as you like, as often as you want, because you can never run out. Experience and curiosity drive us to make unexpected, offbeat connections. It is these nonlinear steps that often lead to the greatest work.
Mark Suster: @msuster is an LA Partner at Upfront Ventures, and is incredibly accessible through his blog BothSidesoftheTable and his live streams on Meerkat. A serial entrepreneur who has sold a series of start-ups to large tech firms, Mark gives wise advice to startups and is blunt about how difficult building a startup is, and has a practical approach to working with startups. His portfolio includes Truecar and is ever growing.
Advice from Mark: “The best way to not get screwed is to succeed. It sounds obvious, but the best way to avoid getting screwed is to succeed. “If you are successful, or perceived as being successful, then VCs won’t want to replace you. Also, stay well connected in the VC community. If you have options in life, you won’t get screwed.
Chris Sacca: @sacca came from Google, and was one of the first in at Twitter, so he’s kind of a big deal. Chris also invested in Instagram, Kickstarter, and Uber, so he pretty much is King Midas when it comes to investing. He’s a bit quirky, always wearing cowboy shirts and running around with Tony Hawk.
Advice From Chris: Don’t cut corners. Don’t B.S. Don’t lie.Be proud of yourself and stand for something. Money will come, trust me but no amount of money in the world will help you sleep well at night if you haven’t been legit.
Jack Dorsey: @Jack partnered with Noah Glass and Biz Stone to create Twitter, and then developed Square for devices in 2010, and is now the CEO. Recently he was selected to be on the Board of the Walt Disney Company.
Jack on teams: “Everyone has an idea. But it’s really about executing the idea and attracting other people to help you work on the idea.”
Kevin Rose: @kevinrose brings great insight from his leadership at Google Ventures. He also was the CEO of Digg, and is pretty active on twitter, sharing thoughts on new companies and design.
Kevin on why vision is important: A team aligned behind a vision will move mountains. Sell them on your roadmap and don’t compromise - care about the details, the fit and finish.
Brad Feld: @bfeld is a VC at Foundry Group and is pretty active on Twitter giving start-ups great advice. He also runs a blog called Feld Thoughts (www.Feld.com) where he gives musings on a variety of topics, most prolifically on entrepreneurship and Venture Capital.
Recent advice from Brad: Too many entrepreneurs are feeling the pressure from investors to project unsustainable growth rates and revenues, with concomitantly the cost attendant to those growth rates, because without these revenue growth rates investors won’t keep feeding the beast. So grow faster, spend more, lose more to attract the next round of investors (Rather than restraining the instinct to raise more and instead create capital efficient sustainable growth rates.). The alternative of projecting organic growth with approximately matched funding simply won’t attract investors.
Fred Wilson: @fredwilson provides a lot of dependable tweets about investing from NYC. His blog AVC has a lot of great content about the NYC tech community, politics, and finance.
Fred on lean iteration: “Building product is not about having a large team to manage. It is about having a small team with the right people on it.”
Jonah Lupton: @jonahlupton is a serial entrepreneur, advisor, and angel investor.
“Entrepreneurs have to be willing to put their own financial stability on the line, stop taking vacations, and work their tails off. If aspiring startup founders believe they can do that, then they might have a chance. If, however, startup founders aren’t willing to risk their financial future and sacrifice their personal lives for their business, then they should probably try to find another line of work.”
Guy Kawasaki: @Guykawasaki
Guy on stacking your team:Good people hire people better than themselves. So A players hire A+ players. But others hire below their skills to make themselves look good. So B players hire C players. C players hire D players, etc.
We interviewed several venture capitalists who could provide additional insights on the funding process.
Shahin Farshchi, Lux Capital: With an engineering degree and experience in several Silicon Valley startups, Shahin has been working in venture for almost a decade. He focuses on energy and technology investments, and has sourced deals for Lux including Silicon Clocks, Planet Labs, Scaled Inference, and Flex Logix. Using his technical expertise, Shahin has the unique ability to examine both the financial side as well as the technical aspects of the product.
Alex Gurevich, Javelin Partners: Alex has a background in startups, he was the first employee at ooma, and was also co-founder of Say-Hey-Hey.com, one of the web’s first free video dating sites, where he was in charge of all product development, fundraising, and business development efforts.
Alex sourced deals such as: Engrade (acquired by McGraw-Hill), KopoKopo, Pixalate, Plug.DJ, Skytree, Telerivet, TheHunt, Thumbtack and WellnessFX.
Joe Guzel, Crosscut Ventures: Joe’s background is at Intuit, where he spend a majority of his time focusing on growth for the SaaS offerings. Crosscut was a small LA fund that grew to a more sizable fund through investments in Shoe Dazzle, Just Fab, Super Evil MegaCorp, Club W, and Data Science.
Jed Katz, Javelin Partners: An entrepreneur himself, Jed lends his experience with Sky Scout and Rent Net (Move.com) to help startups reach their full potential. He’s sourced deals in companies such as Boost Media, Famo.us, Imagevision, Linqia, Netpulse, SmartAsset, SmartZip, Thumbtack, Trumaker, anad Weddington Way.
Ignacio Vilela, StartCaps Ventures: Focusing on virtual reality, mobile gaming, and robotics, Ignacio’s background is entrepreneurial in nature, founding Proximus which was invested in by Techstars London. He started his own fund, which enables top Executives in Europe to invest in the best seed companies in Silicon Valley. He also has a MSc Civil Engineering and BA Business Administration.
Mike Walsh, Structure Capital: Mike’s first success was his angel investment in Salesforce.com, he then dabbled in entrepreneurship and sold his own startup Leverage. His next investment success was Uber, and he used his earnings to start a venture firm in 2013 called Structure Capital, where he’s focused his efforts on under utilized assets in an effort to eliminate waste. He’s invested in over 90 companies including Surf Air, Movie Pass, Shyp, Rinse, and Laurel and Wolf.
“Engage the investor with an elevator pitch, and determine a “pull strategy.” Get on stage is the best strategy. Identify common connection. Reach out ahead of time. Who are the investors who are going? And be proactive. Ask the investor would you be interested in connecting for 5 minutes?
Alex Gurevich, Javelin Venture Partners
“Current CEO’s or past entrepreneurs are the best referrals. They usually come to me and say ,’Hey I’ve been working with these guys, and I have a good company you should talk to.’ And they’re usually right because they’ve been successful and mentoring the startup.”
Joe Guzel, Crosscut
“The best two sources are specific research on my targeted markets and references from my network and CEOs of my portfolio companies.”
Ignacio Vilela, StartCaps
“It’s easiest to get a meeting when referred by a portfolio company founder or other investor - simply because we’re so over-loaded. That said, I’ll take a cold email when someone matches their company with our thesis - which can be found on our website, AngelList, twitter and other places. In today’s day of information anywhere, it’s easy to send a 3 sentence pitch that should garner attention. If a founder can’t invest the 30 seconds to learn about us and match the thesis in 3 sentences, then it’s an immediate pass.”
Mike Walsh, Structure VC
“Accelerators are not a bad way to go...They do a good job of getting visibility from the investment community. Everyone is looking for the needle in the haystack. They make them a little smaller through vetting. We go the accelerator demo days. Why? #1 visibility in the investor community. They are good at establishing angel and investor relationships. When start-ups go through the experience, go through the fire with other people, they share common challenges, unbiased advice. Accelerators differ in their abilities. Some are better than others, some offer mentorship and guidance. Y Combinator, Angel Pad, Muckerlabs, 500 Startups, Founders Institute, Alchemist, Techstars, those are my favorites.”
Alex Gurevich, Javelin VC
“We like the TAM $Over a Billion a truly addressable market. We like a bottom’s up analysis. There needs to be some signal it can get to $100+million revenue is a reasonable amount of time, around 5-7 years.”
Jed Katz, Javelin Partners
“We have a specific thesis of investing in companies that target under-utilized assets and excess capacity. The high-level global themes that drive the thesis are a global growing population and fewer resources (which make sharing and re-using resources more important than ever) and the fact that the freelance market is growing rapidly which allow marketplaces wherein people can find work/hire great people super valuable. The companies are usually marketplaces and are changing big
markets. The thesis grew out of being an investor in the first round of Uber, but priceline and ebay are early examples of this thesis. I was a shareholder in these companies early on.”
Mike Walsh, Structure VC
“What markets get me excited? Large, growing markets that appreciate and are willing to pay for excellence.”
Shahin Farshchi, Lux Capital
“I find a good market opportunity when a big and already existing market is about to be disrupted by any technology disruption. For instance all the sharing economy leaders that has disrupted the biggest markets in the last years: Uber (transportation), Airbnb (home rental), Instacart (Groceries delivery).”
Ignacio Vilela, StartCaps
“I like product demos early on so you know what the product is. Set up the business, show the product, get into market side, competitive landscape, why its scalable, staffing plan, why is it so unique - what is the hardest thing about this to copy? Show the strategic value above the revenue stream. Why would a company down the road pay for this? There needs to be several companies who would be interested.”
Jed Katz, Javelin Partners
“The entrepreneur needs to make sure to have a “personal agenda”. VC’s will possibly take you off track with questions, be sure to tell the VC ‘we’ll address it in a few minutes.’ And keep on track with your own agenda. ”
Alex Gurevich, Javelin Partners
“Being organized is key. Tell a compelling story, we want to know you’re going to be a compelling leader, you’ll be able to recruit, handle complicated conversations, and get the next round.”
Jed Katz, Javelin Partners
“You only have 5 minutes of maximum attention for the investor, be clear and direct. If you are not able to show the potential of your company in the first five minutes, there is definitely a problem, whether you are not able to explain all the potential, or it is simply a bad business proposition.”
Ignacio Vilela, StartCaps
“We may give feedback and come back, ask an entrepreneur to come back in 3-5 months, show us progress, and then they get the money.“
Alex Gurevich, Javelin Partners
“Anytime you’ve been sold it’s because of the feeling that you’ll be missing out...strike the fear of missing out chord. Spouting off the basics is not enough.”
Joe Guzel, CrossCut Ventures
“We like to know initial customer feedback. Is it being shared? What’s the sales cycle? What are clients saying? How often is it being used? Is it addictive?”
“Customers are king. How was their experience? How engaged were they? How would they compare with similar products? Will habits be formed around the product? How difficult would it be to change to/from the product?”
Shahin Farshchi, Luxe Capital
“There is nothing better that a company that already has more than $50k of MRR, no churn and monthly growth over 20%. Being that a perfect scenario, I am interested in earlier stage companies where I can talk with their first customers and be sure of the value of the service and the client satisfaction.”
Ignacio Vilela, StartCaps
“I partner with entrepreneurs. I offer terms that will keep them, and their teams motivated to build iconic companies, and benefit handsomely from their success. If I get a sense that an entrepreneur is optimizing for terms, it’s a clear signal to me that they do not want to partner with me.”
Shahin Farshchi, Luxe Capital
“In negotiations; be reasonable, support claims with evidence and comps (like selling a house), be persuasive and be courteous.”
Mike Walsh, Structure VCp>
We hope that the practical advice will help you successfully build and structure a business, meet investors, raise the right amount of capital, and grow. For a quick recap: