A few people have asked for advice around this, and I should probably put together a whole series of posts (or maybe videos, which I’ve been thinking about) on this very topic. Nevertheless, I can give a high level overview here of some of the basics.
For purposes of this post, I’m talking about equity investors. Pitching a bank for a loan is a similar but different prospect, and if you’re hanging around this blog, debt financing is probably not where you need to look. Anyway, here are some high level considerations:
Rule #1: Recognize that you are SELLING part of your company
When you take an investor on in exchange for an equity piece, you are, plain and simple, selling them part of your company. This is really no different than if someone came up and said they wanted to buy the whole thing from you, except that the investor probably doesn’t want the whole thing, and they expect you to use their money to grow the business instead of buying that beach house.
Rule #2: Sell this part of your company just like you would sell anything else
See Rule #1 – as I said, you are selling part of your company, and you need to treat the fund raising process exactly like you would any other sales process. You need to put together a list of target customers (investors) come up with a short phone pitch (elevator pitch), start making sales calls, and start setting up in person meetings. You then need to gradually walk the prospective customer (investor) through your product (the company) and build their interest and excitement until the point that they are ready to buy it (invest).
Do not think about this any other way. I’ve seen plenty of people that are perfectly capable of selling suddenly fall apart when it comes to managing the investment process, because they somehow thought it was different. Just as you would not trust that your target customers “already know all about your business” you should not trust that an investor has any such knowledge either, which brings me to point #3…
Rule #3: Start with broad, exciting overviews, and work your way deeper over several meetings
Again, this is no different than selling anything else, but I’ve seen things run awry during investor presentations all too many times to not call it out separately. If you are meeting with someone for the first time, do not launch into the minutia detail of your product, technology or service. They aren’t ready for that yet. You need to build EXCITEMENT, not bore people to death with the details. Big strokes of the brush are what you are looking for, not details. And speaking of broad strokes of the brush…
Rule #4: You are pitching your BUSINESS, not your product
It must be true that nearly 100% of first time entrepreneurs focus FAR too much time and energy on the product when pitching an investors (yours truly included). Investors are not there to buy your widgets, they are they to buy your COMPANY. This may seem obvious when I say it, but I can almost guarantee that when you put together your first investment pitch, you’ll end up with twice as many slides on the product as anything else, and if you time yourself you’ll spent half the time (or more) talking product. DON’T. Product is just one piece of the puzzle, bringing me to…
Rule #5: Answer the big 3 questions
What is the market, how do you fit in, and why should I care? Why will your business win (a portion of) that market? Who in the heck are you, and why should I believe you can even pull this off? How much money do you need, what will you use it for, and how to I get paid back?
Those are the big ones. Notice, there’s nothing in there about how your widget works. Such information may come out during the course of answering those questions, but that’s not what an investor needs to know, especially in the beginning. They simply need to know if the market is big, can you pull it off, and if so, how much will they make. Don’t over think it.
Rule #6: Know what you are going to ask for
Don’t go in and not have an answer if someone asks “how much money do you need to raise?” You can have a range, you can have plans that deal with different amounts raised, but you can’t lack an answer entirely. You’ll look like an idiot.
Rule #7: Just because the first meeting (or two) went well, don’t let your guard down.
Venture Capitalists are notorious for making you feel confident during the first meeting or two, and then unloading on you with probing questions during the next meeting. Don’t let your guard down just because things have gone well thus far. You’ll need to be prepared to dig deep into the specifics, once an investor is interested and has had some time to think about and research your business. And related to that…
Rule #8: Don’t get flustered when the questions get hard
If the questions are getting hard, it’s because the investor is legitimately interested in your investment opportunity, and is looking for the gotchas. Don’t clam up when these questions come. Answer them as best you can, be honest, and if you don’t know, say you don’t know. You are a startup after all, and you aren’t going to have all the answers all of the time. I’ve seen more than a few entrepreneurs take it personally when these questions start coming, and believe me, they can come fast and furiously. Again, it’s really a good sign, so be prepared, and if the questions turn this way, know that you are making progress to getting an investment.
Rule #9: Don’t get fooled by those that “seem interested”
This, again, is SALES. You do not stop selling product just because you have a few interested prospects — you keep selling until someone buys all that you have. You can do yourself a world of good by continuing to reach out to new investors until the time comes than an investor commits to putting money in, or asks you to sign an agreement that stops you from pitching others while they look deeply into the deal. Until then, sell, sell, sell, and keep selling.