It’s great to have an idea for a startup that can potentially become something big. However, after the first excitement fades away, you start thinking about more down-to-earth things. And, probably, one of the first hardships that you can face is fundraising. Of course, there are a lot of ways to find money: get a loan from the bank, borrow money from family, friends or other acquaintances, use your saving, etc. But sooner or later, when you start growing, you’ll, inevitably, see that you need to address the investors.
No doubt, it’s a scary thing to go to the unknown people and try to persuade them separate with their money.
However, knowing the answer to the following questions, you’ll be able to prepare much better for this important interview.
What criteria do investors pay attention to when making the decision?
Firstly, you should know that the VCs don't actually like solo investors. When we addressed Alicia Robb, angel investor, advisor to startups and founder of Next Wave Ventures, with the question, would she agree to invest into a solo entrepreneur, her answer was very precise:
Alicia Robb “No, I’ won’t. You need a team to SCALEA." http://www.linkedin.com/in/alicia-robb-a888228/
An interesting idea was expressed by Cliff Hinrichs, Investor and Managing partner @Steele Ventures.
Cliff Hinrichs “For all but the earliest stage investors (probably as early as friends & family, i.e. first money in), having at least one other founder is an important consideration. As late seed investors, while we wouldn’t completely rule out looking at a solo entrepreneur, we would recognize it as another large risk the entrepreneur will need to clear, among all the other risks - so it’s definitely a headwind to funding. A positive way to look at resolving this is: if you can attract at least one other strong co-founder, that’s some validation of your power to persuade others of your vision, as well as another voice to join you in evangelising that vision.” https://www.linkedin.com/in/chinrichs/
For sure, choosing a co-founder is a very responsible and hard step and you need to keep in mind a lot thing before making a final decision. You can read about all the pluses and minuses of having a co-founder in our article-interview Do you really need a co-founder?
Another criterion why the team is important is that in any business you need to have an expertise in many spheres. And, of course, you can’t be a professional developer, marketing and sales specialist at the same time. Even if you are, you, simply, won’t have time to deal with everything.
Cliff Hinrichs Team is always super-important, but arguably even more important than other factors the earlier the stage, when aspects such as product will naturally be less developed and evaluable. Within the team, aside from all the usual considerations, we would highlight resilience as a particularly important character trait. -
Besides, to have one more or several persons who can advise you something and have another point of view is always beneficial.
You may ask if the team is the only criterion that the investors pay their attention to. Well, according to Alicia Robb, market and traction also matter. In other words, if you’re launching a product to the market that is on a high demand now and you’re showing not very fast but still a steady growth, the chances that you’ll get the investments are quite high.
Cliff Hinrichs supports this idea, as well: As a late seed stage investor, we want to also see traction - ideally revenue traction/growth, but if there is not much of that, at least enough to get a hint of the unit economics from which to begin extrapolating possible outcomes. If that isn’t available, then it’s likely the proposition isn’t truly at late seed stage.
One thing that we mentioned above is: What sphere do VCs prefer to put their money in?
Well, here everything is highly individual. For instance, being a progressive person who is concerned much about people, animals’ rights, and the world, in general, Alicia Robb says that she is highly interested in startups that have “significant positive impact on people, planet, and communities.”
As for Cliff Hinrichs, he says that:
...From our perspective here in London, we believe FinTech still has a lot more disruption to go, but as we prefer less obvious areas, we have largely avoided neo-banks and general me-too crowdfunding sites in favour of more specialist areas, such as securities lending (e.g. Sharegain). As many others do, we also find blockchain to be a technology with potentially quite profound implications across many industries. However, whatever kind of business you have, you should remember that the VCs prefer to invest in the companies that are going to enter the market that is not dominated by one or two players. The markets with small players are always more preferable.
Big markets that are not yet or fully disrupted, but ideally more because they are ‘unsexy’ or overlooked than because they are inherently complicated, e.g. by regulation (e.g. some aspects of healthcare). - Cliff Hinrichs. So, if you succeeded and you impressed the investors, you may be interested in:
What can you expect to get from the investors?
Well, the first and the most important thing is money, of course. But, the money support is not the only thing that you can get from the investors.
As Cliff Hinrichs says:
We try to add value however we can while always checking with the company that we are truly adding value. Help ranges from bringing in other investors, refining pitches for later stage investors, designing the sales team/approach, introducing possible customers, to advising about interesting funding and M&A activity in the sector. There are so many possible ways to help! One rule we try to follow is - offer at least one useful thing in every interaction with the CEO or management team. Alicia Robb also points out that they give to the startups they invest in their “human capital, mentoring, networking, etc.” It means that you’ll get help, valuable advice and access to the investors’ connections.
And the last, but, probably, the most important thing that we’d like to cover:
What mistakes you should avoid while pitching to the investors.
When we asked Alicia Robb, she said: "Never come unprepared. Know details about who they fund, what they fund, and why you are a fit".
Cliff Hinrichs also adds:
Never lie (by commission OR omission), as it kills trust in a relationship that critically depends on it. Often entrepreneurs do so out of a feeling of insecurity, thinking they should know something they don’t, but it’s a big mistake. There are absolutely some -- even many -- things you should know (see point 2) but there are many things it’s OK not to know. In the latter case, if it’s clearly an important thing, show at least that you have thought about it, and have a plan to find out more over time. Never fail to prepare the obvious things. I.e. not just your own business plan, but also the interests of the investor you are pitching, people you may know in common, etc. Never lose your composure. View everything an investor throws at you as a positive test to overcome, regardless of whether it’s actually intended as such. Keep in mind that investors essentially have only the written information and your behaviour over some relatively short interactions (and references) from which to evaluate you. Every investor meeting is a great opportunity to show and practise your professionalism, preparedness, insightfulness of vision, genuine curiosity in the face of new information and feedback, and personal resilience. This idea is so obvious, but still, many entrepreneurs ignore these facts. They forget that those few minutes are the only time when they have a chance to impress the investors.
These are the basic things that you should keep in mind before addressing the investors. Anyway, you should remember that getting money is not all. There is still a hard way to go through.