The 1-2-3-4 Process for Getting Funding for Your Startup from Angels
The process for seeking investment for your early stage company is straightforward but requires lots of work. Few do the work.
Stories abound about entrepreneurs meeting with an investor who wrote a large check on the spot. It certainly happens, but it's a pretty rare occurrence. Only a tiny percentage of companies receive angel or venture capital investment, and of those companies, most had a long road of convincing investors. Especially first-time founders.
Here's a process that works for basically every entrepreneur.
First, identify the right types of investors for you company considering sector, stage, capital needs and current risk profile.
Companies spend the least amount of time on this, when this is probably the most crucial step. Identifying investors who are in your "sweet spot" is the best time spent. Ideally, you will want to identify investor(s) who are subject mater experts in your sector and are well connected to investment networks. If you can find individuals who fit both criteria, then you have hit on something important. They are important signals to the marketplace. Listen to their feedback closely. If they aren't interested in what you are doing, listen even harder to figure out why. These people could become your all important Lead Investors - whether officially or unofficially.
Do the work. Search LinkedIn, AngelList, angel investment conferences (even just the on-line agendas) and start making a list of the possible people who could be of interest.
Just as you would qualify sales leads to identify users and buyers, do the same thing with investors. It's the same skill set.
If you have to have multiple people to meet both criteria (sector expertise and networked investor), that's ok. Getting experienced investors excited about what you are doing is important. Listen to them closely to identify why they are interested in what you are doing. Is your message going to resonate with a broader network? Ask about their network and find out what messages resonate with them. Most active angels belong to multiple networks which can include informal angel networks, formal angel groups, and venture funds of different sizes.
Early stage companies often get the feedback from investors that they are too early. It is essential for companies to probe into that response because some investors like to use that as a "soft no" rather than reject your company outright. Other investors really do consider your company too early. Ask them what they think are the biggest challenges and then as "tell me more". If an investor tells you that they aren't sure if you have the right "product/market fit" ask them what they are seeing in the marketplace. Resist the temptation to tell them more about your company when you have an opportunity to get information from them. If you are able to identify real proof points or milestones, continue communicating with investors to demonstrate the progress made.
Second, approach your target investors in multiple ways.
Most startup advisors will tell you to get a warm introduction to investors, which means having one investor introduce your company to another investor. That is certainly helpful and can make a huge difference in speed of investing or connections. However, it can be discouraging if you do not have an established investor network to tap into. There are many early stage investors who will tell you that some of the more successful companies they have met have come through "cold" leads either by watching a demo day, having an online application process open to all, or simple cold emails. Do not underestimate the power of a well-crafted cold email. Many angel groups and small venture capital firms have online submission forms, and there is a range of responsiveness to that process. Some investors rely heavily on those submissions and review each one, while others will openly scoff and proudly admit that they never look at them because their network is so stellar. It can be difficult to figure out whether those submissions are useful, and even if the investors rely on those submissions, you will benefit from connecting directly with investors.
Third, present your company's business proposition as an investment with particular care to outline how you will make the investor money and how long that will take.
Most early stage companies have spent lots of time focusing on the disruptive nature of their business, their product/market fit and their customer discovery. Those are all essential for building a company, but they are different from creating an investment opportunity that attracts early stage investors. The biggest mistake I see companies make is spending the majority of their allocated presentation or pitch time "educating" the investor about the market and not talking about the investment opportunity. When companies pitch to investors, we are making snap decisions about the risk profile of the company and those risks I identify may eliminate your company from future consideration. Focus on the investment opportunity so that we can get to the next meeting to dive deeper into the business.
Fourth, follow through on the due diligence process.
Provide all of the requested material showing that your company has been properly formed, you have a solid operational foundation, and you have a plan in place to mitigate current and future risks.
There are many lists of due diligence requirements available, so there's no reason why your company can't have a due diligence folder available for investors to examine easily.
Early stage companies have many risks, and as companies grow, these risks may lessen and other risks may increase. Investors aren't seeking to avoid risk, because this is a risky asset class. Instead they are seeking to understand the risks and what strategies are in place to address them.
The process for seeking investment for your early stage company is straightforward, but it has been my experience that most early stage companies don't do the pre-work necessary to identify investors and they don't do the follow-up to continue to cultivate them.