A minority of startups are lucky enough to never have to shake down others for cash. Either they are self-funded, or they make enough money from clients from day one. However, for most companies investors are vital to help them get off the ground and subsequently expand.
Techworld spoke to entrepreneurs who have been there and done it. We got their advice on how you find investors, how you judge which investor is right for you, and how you then agree terms. Here's what they had to say…
How to find investors
The first move is to look at your contacts book. Who do you know, and how can they help you?
Nick Katz, cofounder of acasa, recommends a form of networking called 'spiderwebbing', where you meet entrepreneurs, high net worth people, plus friends and family, pitch them on the business, and try to get them to introduce you to at least two people.
Carlos Espinal, partner at Seedcamp, agrees it's worth trying to get introductions: "A strong and functional relationship is the key to any successful investor-founder engagement. As such, the best way to approach finding investors is through introductions from people you trust."
You have to pitch to a lot of people so be prepared to deal with rejection during this early phase. This is no bad thing - in fact it helps you to improve, says Katz, who pitched 109 people for his first £150,000 round just over two years ago and ended up with eight investors. He has since raised £1.2 million across three rounds.
"Getting 'no's' makes you stronger but importantly, no matter how awesome you are your first pitch will be 1000x worse than the final pitch you deliver to close your round," he says.
Katz adds: "This is one of the best reasons to start with friends, family and investors you won't be upset about saying no, i.e. people you think would probably say no, no matter what. Burn some of these investor meetings early!"
It's also worth allotting more time to fundraising than you expect. Katz says it takes "somewhere between two to four times the amount of time you think it will…you won't close in two months. It's going to take six to nine months for your first round".
You need to do your research, advise ManoMano founders Philippe de Chanville and Christian Raisson. Check investor listings and ratings, look at the types of startups they invest in, keep on top of the latest news within your industry, try to get an introduction from a third party, they suggest.
Finally, you should always aim to meet a potential investor in person, not just via phone or email.
How to judge who's right for you
You should think of an investor as an extension of your team, according to Adam Ludwin, cofounder of Captify.
Use their insights, knowledge and experience but "ultimately take the viewpoint that from day one you will include them in your strategy and growth plans... Listen to your investors and you’ll be better poised to avoid damaging pitfalls," he says.
Ideally you want a mix of investors – some that are supportive and boost your confidence, and others that are more challenging and push you on, says Katz.
Colette Ballou, founder of Ballou PR, agrees. "Look to bring in investors of different genders, races, ages and sexual preferences. Your customers will be diverse so it is important that your investors reflect the company’s audience," she says.
Espinal says there are three simple factors: relationship (can you talk openly together, and could you deal with a crisis?), functional capability (does this investor have the right background to help you?) and focus (does this investor invest at the stage and sector your company is in?).
It's worth remembering it is a two-way relationship, so don't be scared to ask investors what they can bring to the table, advises Ballou.
"Do they have expertise in expanding companies into different markets or building a great company culture? Can they help you get follow-on funding? Ask them directly, take note of their answers and hold them to it," she says.
How to approach meetings with investors
Katz offers the following advice:
- DO target people who know your market
- DO target people who can write cheques for 5-10%+ of your total round size
- DO target people who invest at your stage
- DO act like you've done this before
- DO be confident
- DO take meticulous notes, or if you can't, do a brain dump after the meeting
- DO iterate your pitch every pitch, or every other pitch
- DON'T be arrogant
- DON'T pretend you know things you don't, you'll get caught out and lose all trust - be honest, especially if you have very little experience
- DON'T dismiss points or critique they bring up
During meetings Katz advises listening carefully, trying to avoid interrupting and suggests adapting your pitch to each individual investor you meet.
How to agree terms
Get advice from people you trust and who have knowledge of negotiating investment terms – be it entrepreneurs, lawyers or other professionals, suggests Katz. Watch out for "predatory early stage investors" he warns – of which there are many.
It's worth trying to create competitive tension with multiple, competing offers – but keep it simple.
"Try to be as plain vanilla as you possibly can. The simpler the better. The better, the faster you close," he says.
It's important to be flexible, advises Colette Ballou. "For people who can’t afford to invest, consider placing them on your advisory board and granting them a small amount of equity," she says.
Ballou also recommends term limits for advisory board members: "It’s controversial, but consider having one-year term limits for advisory board members - renewable, of course. Why should you be stuck with advisory board members who no longer fit your needs?"
Although it's tempting to be aggressive, remember you'll have to work with an investor for a long time, so find someone you can negotiate a fair deal with, says Espinal.
"Prepare in advance by familiarising yourself with what are standard VC terms…Pick your battles and be knowledgeable about what is standard by also asking other founders of similar type of company and that have received venture backing," he adds.