Whether or not you understand the investment process or have raised money before, as the leader of the company, you need to know how to get investors and develop skills that increase the likelihood that your company will get funded.
In the beginning, it is likely that you’re the only one raising money. Acquiring capital might mean asking friends or family for $25,000 or pitching an angel network for $100,000. If you are raising larger sums, it is likely that you will hire an outside party (e.g., broker) who will facilitate the third-party process.
In either case, you will be the one who must convince investors of two things—that your business is worth investing in, and that you are worth investing in.
How to Get Investors
Raising capital is definitely an area in which outside help can be critical. There are many professionals—brokers, finders, bankers—that do this for a living. Your facilitator’s expertise will only go so far.
Even if you bring in outside parties to help you with the process, the decision of an investor to invest will depend on your ability to communicate the value of the business, the opportunity the investment offers them, and your capability to effectively put their investment to work.
Investors look for differentiated products and business models, but they look just as carefully at whether the people with whom they entrust their capital, have the skills to succeed.
Developing the skills to raise money is key for every entrepreneur. Even if you rely on outside direction, you need to develop some basic skills. The perspectives you develop will increase your knowledge, sophistication, and confidence in a tough but necessary process.
Realize You Are Always Onstage
Every single interaction— the phone calls, email, text messages, meeting, interaction with staff —with or in front of an investor, is part of the data they will use to evaluate you as a leader. There is no “off the record” with investors.
In New York City I had a colleague that had always been involved with a cancer charity. His Mom died way too young from cancer. Long before becoming an entrepreneur, he was dedicated to raising money for the disease. When he started his company, despite his crazy schedule, he kept up his charity work.
He became a member of the Board of a local cancer charity. You would think that these are exactly the character traits you would want in a leader. I found out it wasn’t so obvious. During a dinner party, one of his investors said to me, “It is great he keeps up with the charity but it takes a lot of his time.”
Disappointing, but the reality is that everything you do, any time of the day or night, is on stage and will be scrutinized.
Be Clear and Concise
The need to be clear and concise must permeate everything you do. This applies to every audience, but even more so to investors.
You must be able to clearly and concisely explain the value of the business. Keep answers to questions short, simple and to the point. If they want to know more, they will ask. Keep it simple. Investors look at hundreds of investments and will pass if they don’t quickly grasp the value of the business.
Clive Davis is a music industry legend known for discovering Whitney Houston and helping artists such as Earth, Wind and Fire, Aretha Franklin, Rod Stewart, Alicia Keys, Barry Manilow, Christina Aguilera, Carlos Santana, Kelly Clarkson, Leona Lewis, and Jennifer Hudson.
He has listened to thousands of demo tapes. He was asked how he chooses artists from all the clutter. His response was that he chose songs “that made him tap his feet.”
Investors need to tap their feet. If a leader cannot clearly communicate the value of the business, investors will pass. In addition, when investors interact with companies and their leaders, they are not only evaluating the merits of the business but also the entrepreneur and his or her team.
Proactively Bring Up, Acknowledge and Address Weaknesses
Every business has gaps. Every business has competitive risks. This is especially true of early-stage businesses. The way you address these gaps, tells a lot about you and the business. There are generally two routes entrepreneurs take when it comes to weaknesses. One approach is to be defensive or downplay the gaps and competitive risks:
“We understand that ABC Company has capital, but their product lacks the
quality of ours. Our engineers are some of the most talented and dedicated ones out there and we don’t think they will be able to keep up with us.”
This approach raises two concerns. First, it demonstrates that you are not objective about your business. Specifically, it shows that your passion and desire cloud your judgment, and your ability to make decisions. Second, it strains your credibility as a leader.
As a leader, you must embrace the brutal truth (such as competition and weaknesses) and use your talent to overcome the challenges. When you defend the indefensible, you undermine your ability to lead. Investors are always concerned that entrepreneurs will allow passion to cloud their judgment.
A second, and more effective approach is to be proactive in acknowledging weaknesses, define the obstacles and consequences, and present an approach for addressing them:
“We believe we are tapping into a lucrative market space. We expect there to be many competitors with capital. Our success will depend on our ability to execute our product strategy. Specifically, if we can deliver our product by the end of the year, and have that product integrated with some of the existing software players we will gain a small but critical lead. From that point, the lead will erode over time and we will need our distribution to expand to stay ahead.”
Proactively bring up your deficits and your strategy for strengthening your weak points—before you are asked. This is a pleasant surprise for investors. They are used to leaders defending or minimizing their weaknesses.
If you acknowledge your weaknesses and state a plan for dealing with them, it creates trust and credibility with investors.
Let the Business Sell Itself
Don’t hard sell your organization. Let your offering sell itself. How do you do that? Use points of validation by third parties—the market, customers, the press, and employees that have proactively joined your team. Investors won’t always believe what you say, but they will believe third-party validation. You could mention some of the following:
- Market. Has the market shown interest? For example, “The Innovation Group at IBM featured our solution at their annual Innovation Event.”
- Customers. Highlight customers. “Four of the largest banks in the country are using our solution.”
- Key Team Members Who Have Joined. Mention key team members. Talented people joining your team is a point of validation. “Our head of technology used to lead the SAAS technology group at ABC Company.”
- Well-known Press. Highlight press that you have received from meaningful publications. If the press is the five-page Johnstown Gazette in a town of 1,000 people, skip it. Highlighting small press can actually undermine your credibility because investors may view that sample as “the best you have.”
Conclusion: Getting Investors For Your Business
These techniques help you present key evidence of your viability with the validation of independent third parties. This is more powerful and credible than your personal assurance or effort to convince potential investors that your solution is “great.”
Remember to be clear and concise, address your weaknesses and competitors and show your investors that the business has your full and undivided attention.