As one of the leading accounting and tax solution focused on growing startups, inDinero works with many founders who have questions about fundraising. How and when to find investors and what to do once you’ve landed the perfect investor or lender -- from a financial perspective.
Fundraising takes research. You quickly learn that there are many do’s and don’t’s. Mostly you will learn that there isn’t a ton of actionable advice from entrepreneurs who have done fundraising before. There is very little regurgitating you can find online of a “10 Best Practices List,” that we all want to see.
The best is to find shared stories from accomplished CEOs and industry professionals. Hearing actual experiences from professionals raising money -- there are a few distinct differences between talking to investors about a physical product versus a million dollar idea.
First, let’s start with the common denominators.
Three things every investor wants to see.
Each investor goes into a startup pitch with their own expectations and details they’ll want to see -- but once you boil it down, the essentials remain the same.
Three essential elements.
Suren Sultania, the Co-Founder and COO of the travel app startup, Headout, shares the three essential elements investors look at:
1. First and foremost, investors care most about the team and what skills they have. More importantly, how committed and determined are they toward the business?
2.They also need to get some context for the long-term potential of your business and how competitive it will be in its market.
3. From there the the investor will want to know how quickly the team can learn, make improvements, and grow.
Aside from the widely accepted investor expectations, there are also commonalities between your goals and how you plan to reach them. To scale any startup or build any business idea, you’ll need to focus on and nail the following details:
1. Solution to pain point and market potential.
What are you hoping to solve? Does your product or idea solve a problem that impacts a particular type of individual or organization?
2. Vision and growth plans.
Your ability to taste the future of your business and what will separate it from a shameless cash grab or get rich quick scheme.
3. Your finances (personal and business).
The way you handle money tells investors a lot about your priorities. Justin DiPietro of SaleMove puts it best, saying “if someone’s going to give you millions of dollars, they’re going to look at everything -- literally -- everything. From the very start, always dot your I’s and cross your T’s.”
4. Pitching an idea to investors.
You’ll find advice for pitching investors ideas plastered all over Inc., Entrepreneur, Forbes, TechCrunch, etc. Many would tell you that ideas are a dime a dozen. Not really. What is it that makes that dime idea shine and stand out? Think: ridiculously thoughtful pitch.
Really good products or prototypes can speak for themselves. If you are still in the ideation stage, your pitch needs to tell an even stronger story. Like every good story, yours will need a beginning, middle, and a hook. Not an end -- your pitch story is almost like the pilot episode of your TV show, so make sure you’re creating something worthy of binge-watching.
Selling an idea only works when you have the right people.
It helps to have experienced team members—either in your industry or in startups. When Kevin Busque started Guideline, he already had decades of entrepreneurial experience under his belt consulting with various health tech startups and working alongside his wife and Founder & CEO of TaskRabbit, Leah Busque.
Kevin's experience and stellar business idea not only helped him recruit a team of reputable experts at Guideline -- but also helped his startup establish trust with investors. “Before [Guideline] had anything user-facing, we had the organizational infrastructure. We were able to close the seed round just on the idea, the size of the market, the pitch deck, understanding the problem, and the team.”
What to emphasize when you pitch an idea to investors:
The pain point you’re trying to solve and any broader implications of not solving the problem. This helps bring value to life.
Research and Experimentation (or R&D) opportunities and patent potential. This can add incentive for some investors to get in on the ground floor before the development phase.
Your team’s credentials and past work (operating costs).
Some considerations of pitching an idea:
Roles your financials play:
Investors want to know how you’re planning on using your money. At this stage of your business, the costs you’ll want to account for and tell them about are all tied to turning your idea into a real, tangible business: sourcing, hiring, and producing or developing your product.
Protecting your intellectual property:
This seems very basic but is the most valuable way to position your idea. Do you have a patent on your idea or the way you plan on doing things? That alone can increase your valuation and potential investment interest.
Pitching a Product to Investors.
Pitching a product to the investors is the easier of two conversations. If you have come this far without bringing on outside investment. Clearly, your time investment stems from passion and faith that what you’re doing is worthwhile. At this point, it’s all about helping others see your vision.
Have You Emptied Your Savings Account?
Suren Sultania and his fellow co-founders quit their jobs and emptied their savings accounts to build their travel app, Headout, for six months before approaching investors. “We decided to bootstrap our app as far as we could and validate it both to ourselves and to the larger community,” he shared, “only then did we pursue fundraising.”
What Risk Can You Handle?
A willingness to take on that risk is the ultimate proof that you believe in your product and the first hurdle toward getting investors to share your passion.
Sultania continues: “At first it felt like a gamble, but a couple of years of savings was a bet we were willing to take because we had complete belief in ourselves and what we were building. If we couldn’t take that risk, how could we reasonably ask somebody else to come and invest, right?”
Tips for “selling” your product to investors from sales experts.
Will Dinkel is the Co-Founder and CEO of Nova, a sales tool that incorporates artificial intelligence into sales communications. As he hit the fundraising road, he found himself putting his own tools to use more and more. When it comes to planning a sales or investor pitch, the essentials are very similar:
Let your product speak for itself in a live demo, catered to your investor audience.
Build rapport and tease out the value you’ll provide (i.e., why they should invest).
Give them a clear, solid a call to action.
In that regard, pitching to investors and selling to customers are very similar activities, but while pitching to investors is, in theory, selling, the supply in this scenario has a bit more leverage than the demand.
“Almost any time you’re selling something to a potential customer, they know you want them to buy. But [when it comes to fundraising a business] there’s a limit to the number of investors you can have. This shifts the social dynamics of supply and demand.”
What to emphasize when pitching a product to investors:
The quality of your product or offering and things you want to improve:
Be clear about the current state and quality of your product -- is it packaged and ready to sell or still a prototype?
Potential buyers or market opportunities:
Who will use your product, why, and how much will they pay? At this point, you should not still be shooting in the dark about your target audience, customer acquisition plans, or overall go-to-market strategy.
Considerations of pitching a product:
Roles your financials play:
With so much of the work already done building what you plan to sell, your financial projections and revenue model should focus on growth goals and customer acquisition.
Marketing and sales:
This will be at the forefront to increase awareness that your product exists and convert customers. As things take off, fulfilling demand (producing enough goods or hiring enough staff to support demand). How much money did it cost you to build your product and how can you save money as you scale production?
Picking your partners and investors wisely:
The more specific your growth plans and goals get, the more you’ll want to consider when choosing investors that can help your business. It can be advantageous to target niche entrepreneurs or VC firms who have specific knowledge and history within your industry or sales channels.
Ready to knock your pitch out of the park?
To recap, here’s an overview look at the key ways you can improve your pitch regardless of the product or idea:
Emphasize your team first. Even if you have an exceptional product or idea, a team can make or break investor confidence.
Tell a riveting story. The best way to get others to believe in your idea or product is to show them why you “invested” in the first place.
Protect your business and relationships with fellow partners and investors by having solid planning around your financials, intellectual property, and legal affairs.
Be targeted, and find the right audience so you can let your product or idea speak for itself.
Choose investors wisely—unlike finding customers; there’s always a limit to the number of investors you can “sell” on your business.
The takeaways in this article come from fieldwork done while putting together:
The Startup Founder’s Guide to Fundraising, eBook, written by Melissa Hollis of inDinero.