So you have a great idea that could turn into a successful company, but to get it off the ground you need some cash. But how to get investors?
Assemble a credible team
“Do not come to me by yourself,” says Mike Scanlin, a longtime venture capitalist and CEO of Born to Sell, an investment tool company based in Los Altos, California. “A professional investor is not going to invest in one guy. The team has to be relevant, so don’t just pick two buddies that don’t have experience in the area in which you are working.
“Also, make sure that no one in the team is related to each other. Family members working together are a huge red flag to investors.”
Come with an open mind
“Approaching an investor with an valuation for a deal that is predetermined or unrealistic isn’t a good idea,” Scanlin says. “Instead, tell the investor that you are reasonable and will let the market decide the valuation of your company.”
Inspect the idea
Investors will only look at your company if you have a scalable, replicable idea, says Herb Sih, managing partner of Think Big Partners, an early stage business incubator based in Kansas City, Missouri.
Make sure you’ve sold a few of your services or products (or have the promise of a future sale) before meeting with an investor.
“You may have a great idea, but unless the marketplace wants it, you have nothing,” Sih says. “Ask yourself, ‘Is it scalable? Can you replicate it? Can you make the idea appear in other industries?’ If the answer is no, I’m not sure it is worth doing.”
Own a ‘secret sauce’
“To attract an investor, you need to have a patentable technology that you invented, exclusive access to a patent, or a secret way of doing things that is hard for other to reproduce,” Scanlin says. “A business barrier is also a great sign to an investor. For example, if a leader in your space has decided to use you exclusively, that is great.
“The basic fear that investors have is that the week after you give $5 million to a company, a handful of VCs down the street will do the exact same thing. You need to be different.”
“You really need to have a proper handle on your books and make sure everything is in the proper format,” says Sih. “For example, do you own intellectual property? Patents? Make sure you have everything accounted for before going to an investor.”
Build a board of thought leaders
“Surround yourself with quality people, even if you can’t hire them full-time,” Scanlin suggests. “If you can get a university professor or a business expert to sit on your board of advisers and give you contacts in your industry, that is a good sign to investors.”
Inspect your business plan
Instead of approaching an investor with an 80-page business plan, Sih suggests keeping it simple and sticking to the most important parts: path to profitability, competitive intelligence, and executive summary.
“I want to see the first year or two years—your fundamental path to profitability,” he says. “I want to see an executive summary of core concepts—what problem are you solving? Do you have an understanding of the threats in the marketplace? What do your competitors look like?”
Cater to a large market
“Investors do not want to fund small, niche businesses,” Scanlin says. “Because angel and VC investing is risky, they need big hits once in while to overcome the large number of total wipeouts they experience. The surest way to have a big hit is to address a $1 billion market, or larger.”
Startup funding can take a while. According to Scanlin, most angel investors and venture capitalists make only one investment per month.
Best-case scenario: your company gets funded in two months. Most of the time it takes at least three to six months, says Scanlin.