Seven steps on the way to successful investment in your startup
What makes a business idea attractive for investment ? How to attract investment in a startup successfully? Does your startup need an investment strategy? Anna Magera, a senior partner in startups and venture business at the international consulting company Finance PM, whose team works to help entrepreneurs in this difficult process, talks about what will help you in fundraising.
What makes a business idea attractive for investment:
To begin with, you should determine what makes your startup or idea attractive for investment.
The first, and probably the most important step for this is to give yourself an honest answer to the question “Am I (my startup) solving a real problem?” There are many components to this question: first of all, it is necessary to determine whether the problem is real, and whether there is evidence of this – certain statistics, people who suffer from this problem.
“It is important that you can confirm the existence of such a problem and the absence of its solution by communicating with real potential customers.”
It is also very important for investors that the market you are targeting is large. The question is whether your idea and your decision can be scaled.
In order for the idea to be scalable, you need:
- A big market, because “if the market is small, if you occupy a small niche and solve the problem of a small audience, it can be a great business, but it is unlikely to be interesting for a venture investor.“
- availability and ease of dissemination of information about the idea, i.e. the technology of your project.
The second question that needs to be answered in the context of the attractiveness of a startup is “how cool is my team?”
The investor invests in the team, so “it is important to understand how broad and high-quality experience each team member has, and to what extent this experience can be used to implement this idea. This is very important, especially in the early stages, when you don’t have a product yet, there are no customers who pay money.” Even if an investor has questions or uncertainty about the current idea, he will still believe that your cool team might implement something other than this one.
And the last, but not the least important question – “does the startup have traction?”
About the early stages:
Many will say that it is impossible to show progress at an early stage, but it is worth remembering that there are investors who invest at a very early stage, when there can be no talk of traction. There is such a thing as three F – friends, family and fools, and of course do not forget about the angels, accelerators and grants.
Traction is a thing that cannot always be obtained with large investments, i.e. you do not always need a huge amount of money to provide the first traction, which will confirm the demand in the market. To do this, you can simply find cool channels to promote your product, create a great community, conduct tests and receive feedback.
First of all, understand what can be the progress in your case. Can you achieve good results without large financial investments and confirm that you have potential users? Can you increase their number quickly enough? Maybe things are even better and you have a customer who is already paying you?
“The sooner you learn to get these confirmations cheaply, the better your chances are to successfully communicate with the investor.”
Finally, to make sure your startup is attractive to investors, ask yourself three mini-questions:
- Do you have a unique trade proposition (USP)?
- Is the Go-2-market strategy ready? “You may have a cool team and a product, but you don’t know how to sell it at all, then no one will know about you. That’s why it’s important that you know how you’re going to sell right from the start.”
- Did you choose the right time to implement the idea or “are you jumping to an already departing train?”
How to successfully attract investment in a startup:
- Do not rush to attract external funding. “Just because you’ve attracted investment doesn’t mean you’re already successful, so you don’t have to chase it. The longer you can develop your product, make sales without external financing, the better. ”
- Always start looking for new investments before you spend all your money.
- Watch your investment attractiveness.
- Choose the right investor “If you let an outside investor into your project, you lose some control.” In startups, reaction speed and flexibility are important, and with an investor “on board” it is more difficult to provide them, keep this in mind.
- Invest time in building a network of contacts among investors. “Money alone is unlikely to take you far, so try to get connections from the investor, potential customers and partners.”
- Prepare to attract investment.
- Focus. The chances of attracting investment in a startup that is 100% focused on the main idea are much higher than one that works half-heartedly.
- Don’t raise too little money. “When you raise funding, your main goal is to use this money to achieve results that significantly increase the capitalization and valuation of your company. There is no point in taking a small amount and doing something insignificant, because it will not affect your assessment in any way.”
The main stages of the process of attracting investment
- Prepare all the necessary documents
- Make a list of all potential investors
- Contact the investor
- Present your startup
- Have a Q&A
- Get a term sheet
- Go through due diligence
- Sign a shareholder agreement
Does your startup need an investment strategy?
The short answer is yes!
First of all, when hearing the words “investment strategy”, startups think “but this is not our job, why should I do this?” Yes, this is really not your job, because you are involved in your product, its development and promotion, but there is one thing: in order for all stages of fundraising to be as successful as possible and for you to achieve your goal, you will need to develop a strategy.
To decide on a strategy, answer the following questions:
- What company do I want to create? What scale?
- How much funding is needed?
- How much is my startup? Evaluate!
- What type of investment – direct or convertible debt?
- What do I offer to the investor? Work out the financing conditions.
- Who can invest? What are my target investors?
How to communicate with investors and build long-term relationships:
Start building investor relationships before you start building an MVP!
It may be too late for some, because you already have an MVP. In that case, start investor relations now, better late than never.
To successfully build a relationship with an investor, you need to prepare. In addition to being prepared for your part, you should learn more about the investor himself; things such as his background, interests and hobbies. Always be as polite and positive as possible in communicating with the investor, remember that you are building a relationship with a person, not with financing.
Always try to be grateful for your time, even if the investor refuses to finance you. In such cases, you should ask for feedback, to emphasize how important it is for you.
What you must never do in communication with an investor:
- Lie and hide information
- Talk / show too much.
“When you are asked a question, answer it. It is not necessary to disclose all possible information. ”
- Leave questions unanswered
- Take everything personally.
“When they say no, it’s not you, it’s the project. “No” today does not mean “no” always.”
What is Due Diligence:
The Due Diligence process includes an analysis of your financial condition, the details of your product, your business, technology, legal aspects. The investor does all this to understand whether it is worth financing your startup; because it is a big risk for him and he wants to minimize it.
During Due Diligence, the investor considers the product, technology (architecture of your startup) and market (all the latest analytics), go-2-market strategy, risks, team, your progress, market exit strategy, financing (history of investments and what you used them for). The investor looks not only at what is now, but also at what was in the past and what will be in the future, so everything must be ready.