Almost all startups – whether they are in major hubs like Silicon Valley, Boston or New York or less metropolitan areas like Kansas City, Mo. – face the same problem.
Every Wednesday morning, I sit in 1 Million Cups Kansas City, an educational program where startups pitch their companies to other entrepreneurs and community members for feedback, listening to the 20 minutes of Q&A between startups and community. I hear a myriad of questions, but when asked about what obstacles entrepreneurs are facing or where they need help, there’s one universal challenge at the top of every startup founder’s list: funding.
“We need funding,” they say. “We’re really looking to raise more capital from investors, angels or anywhere.”
This challenge always manages to find a way into a startup founder’s conversation. And while starting lean and bootstrapping are great ways to begin a venture, there comes a time when some companies will need to look elsewhere to continue their growth. Fortunately, between venture capitalists, angel investors and equity crowdfunding, more and more channels of funding are becoming available.
That said, the funding road isn’t easy, and it is difficult to get people to fork over cash to invest in your company. To enter into these meetings with confidence and the possibility of success, entrepreneurs need to be prepared in the following ways:
1. What’s your story? This isn’t just about your product, your service or your elevator pitch aptitude. This is about you. This is about your team. This is about how you got to this point in your business. Investors want to know what it is about your background that brought you to them with the solution you’ve created. They want to hear what previous experience you’ve acquired that makes you the right person to invest in and help your company grow. Show them your passion.
“The hunger is important,” said Tim Barton, angel investor and founder of Freightquote.com. “It’s not their arrogance or boastful assurance in the company that appeals to an investor, but their hunger — the passion that drives their business.”
Investors aren’t just investing in a company. They’re investing in the person behind it. They want people who will work diligently and with zeal (and, as a result, make them a return on their investment).
Know your story. Practice it. Be prepared to tell them what your company does, who you are and how you got there. And all within a relatively short period of time.
2. Know your split. Each entrepreneur has his or her own ideas about equity offers to investors. Depending on the amount of money they’re anteing up, some investors will want a lot of equity and some will want a little. Whatever the case, it’s always a good idea to go in with your own idea of what’s a reasonable split. Be careful not to give so much away that it diminishes your incentive to work, owing to the few profits you’ll stand to receive in return for your efforts.
“I like entrepreneurs to make the first offer in equity,” said Gina Danner, an investor with Women’s Capital Connection. “They had the idea. I want to make sure the equity I’m taking keeps them engaged and thrilled to grow it.”
Do the math. Whether it’s $25,000 for 5 percent or $200,000 for 16 percent, make sure you’ve run the numbers and can see when the deal makes sense and when it does not.
3. What’s the money for? Map out what you plan to do with the investor’s money. This doesn’t have to be written in concrete, because we all know things in a startup are ever-changing, but have a plan that galvanizes the “big idea” for your venture. If it’s to hire more people or buy more space, say that.
“Be up front about what the money is for,” Barton said. “If they need a salary, I want them to say that.”
Investors may not always agree with the terms or ideas you’ve laid out, but they’ll see a committed founder who knows where his or her next steps are headed. (Instead of someone looking for money because he or she believes it’s just the next step in having a startup.)
4. Don’t overpromise. Potential investors are going to ask a lot of questions. The key here is to be honest with them, foregoing any bluster or pretending. As a young company, there will be many things to figure out. Don’t cover up your uncertainty by lying to or overpromising an investor.
“Sometimes I ask a question to which there isn’t an answer, because I want to see if they can admit when they don’t know or if they’ll just make something up instead,” said Wes Bergmann, an angel investor at Betablox Business Incubator. “It’s a red flag if an entrepreneur is that desperate for money.”
Being able to recognize your company’s current limits or unforeseen changes means you can look at your state of affairs through a realistic lens.