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Startups do not need to already have brought in revenue in order to approach investors (although that can be a big help). The key thing is being able to demonstrate to them how you will monetise your company.
Moreover, you need to show how this will be sustainable and scalable, where your business is generating a healthy profit down the line. The message investors want to be convinced by is that your company will grow, and that they will benefit by investing in this growth.
#1 Know Your Capital Requirements
Before you approach a potential investor, you need to have a strong grasp of how much funding you require from them – as well as what you will do with it.
This, of course, requires that you do some forecasting. Something that is very difficult to do, and which investors are typically skeptical of. However, despite the unreliability of startup forecasts, investors will want to explore your thinking behind your own forecast.
Just be very careful to explore and ground your assumptions underlying your forecast.
For instance, are you assuming that the price of a key component of your product will remain constant? Given past trends and likely future developments in the market, is that thinking valid? What kind of stress test can your business model endure if the component price goes up?
If your business is currently pre-revenue, make sure you are able to outline a credible estimated time to revenue (i.e. how long it will be before you expect to start making money). Also be sure to project how much of your revenue is expected to be classed as “recurring”.
#2 Do Some Networking
Make sure you speak with investors where possible, prior to asking them for money.
Build relationships and have conversations with potential investors. This will help you hone your revenue model, strengthen your value proposition and solidify your startup against potential weaknesses and pitfalls which could undermine or even sink it.
#3 Do Some Economics Homework
When you present your funding pitch, will need to show investors how your business will make money, and how it will scale. As a startup business owner, you will must also be confident demonstrating your knowledge of unit economics to prospective investors.
For instance, what if your anticipated cost per acquisition (CPA), and customer lifetime value (LTV)? Do you expect the CPA and LTV to change as you grow?
Most of us will have squirmed watching a program like Dragons Den, where sometimes the business owners pitching do not understand these kinds of terms when asked about them by investors. Don’t let that happen to you.
Cover every angle of your business, and prepare as many angles as possible. Try and put yourself into the mind of an investor. What sorts of questions would you want answering prior to investing in your company?
#4 Write Down Some Expected Investor Questions
Following on from this point, it is usually a good idea to actually record the questions you expect prospective investors to ask you. For instance:
- What is your current / expected cash burn?
- If I/we granted the funding you’re asking for, how long would this stretch out to?
- How much involvement, commitment or support do you expect from me/us as investors?
- Which milestones do you expect to meet with the investment I/we give you?
- What level of ownership in your company are you prepared to part with?
#5 Survey the Landscape
Your prospective investors will want to know that you have firm grasp of your market, and the competition your company and product face.
Make sure you make a comprehensive list of your competitors, and ensure you have a thorough grasp of each of them. At a minimum, do a SWOT analysis for each one.
You will also need an in-depth grasp of your market and sector. Which segment are you operating in, exactly? Which demographics are you going to be selling to, and why would they want your product over alternatives in the market?
#6 Prepare Your Pitch
This is the part of fundraising that lots of startup business owners tend to focus on. It’s unsurprising, as public speaking or presenting is one of the scariest things for most people.
Be brave. One of the biggest parts in overcoming your fear is to prepare. If you know what you’re going to say, and have anticipated investors’ questions properly, it’s safe to say that you’re over halfway there with delivering a successful pitch.
Try not to plan to be funny. Just be yourself and lay out what the investors will want to hear.
For instance, if you can demonstrate growth and traction already in your startup, make sure you mention that. Expound on your vision for the next 6-12 months, and outline your goals and milestones within that time-frame.
Make sure the bulk of your time talking about the product – the problems it solves for customers, and the pain points it addresses. After your product, your focus should be on your revenue model – how you will make money, and how long it will take for that to happen.
Going to the Five W’s isn’t a bad idea at all for your pitch:
- What is your product, and how is it different? What does it cost?
- Why is your product needed, and why at this moment?
- Who is your team, and who is the product for?
- How will you bring your product to market and grow the business? (How).
If it helps, consider taking a course on public speaking to brush up your presenting skills. Do some practice runs of your pitch with friendly investors who will give you honest feedback.