We have already discussed the stages of funding, the meaning of the startup capital, the methods of evaluating your company, and various sources of investment. This time we will particularly focus on all the necessary details about finding investors, getting them to talk to you, and convincing them to fund your startup through the negotiations.
It’s our 10th article from the “Startup series”, and today we will talk about how to get fund for a startup. Here are previous ones, so if you have passed them through – it could be also interesting, so you are welcome to check them too:
How and where to look for an investor?
- Use your personal contacts, tell about your project as many people as you can, interest them. First, it is a good test of your ability to present your product. And secondly, remember about the theory of six handshakes. Maybe one of your friends knows your future investor, so be active in the networking on LinkedIn and Facebook.
- Participate in hackathons, entrepreneurial contests, pitches for business angels and investors, where you can present your project to specially invited investors. There are at least 15 hackathons held in the US every year that could be used for getting funds for startups.
- Use all the power of networking at events. Participate in events for entrepreneurs, business conferences, where there is a coffee break to meet investors and get them interested.
- Participate in accelerator and incubator programs. To do this, you need to do a little research. See which accelerators are best for you, list them, indicating the dates of new sets and their project requirements. And apply to get training and investment.
- Use crowdfunding platforms to find investors.
- Send applications to funds, private investors, etc. Just study them first. You need to hit your project exactly on target, and not send a newsletter to all investors and funds.
The mechanism for attracting investment can consist of several approaches from this list. Finding the right combination that helps you to efficiently find relevant investors is the first step of how to get funds for a startup.
What does it take to attract investment?
How to securely attract investment in your project? In fact, no way. There are no guaranteed methods, but there is a procedure for attracting investments.
1. Conduct an assessment of your project
Is the stage of your project appropriate for the type of investment you are applying for? For example, you just started making a prototype of your product and turned to a private equity fund for capital. It is guaranteed that you will not receive investment, because the fund is interested in projects at other stages of development.
Do you have a strong and experienced team? If not, then you should first work on this issue, and then look for investments.
Analyze how much your product is needed by the market and how big this market is. Try to draw up a business plan for the project and implement some financials that are the most required by the investors. For instance, accrual reporting is not easy at implementing but certainly gains you extra points in the investors’ opinion.
2. Research potential investors.
What projects do they invest in, what do they look for when evaluating a project? Contact only those investors (funds, accelerators) who are suitable for your project in terms of subject matter, numbers, market, and other parameters. Even a cursory study is enough to understand the investment focus of a fund.
Your project should have a working product or at least a prototype that you can show to a potential investor.
It is good form, and more often a necessity, to have a presentation. The approximate structure of the presentation: problem, solution (product), market size, competitors, financial indicators, team, previous capital raising (if any) and how it was used, how much investment is needed, and how you plan to use it.
If you already have clients or a list of potential clients, prepare it and show it to the investor.
How to negotiate with an investor?
You need to be properly prepared for the meeting. You should know everything about your project, as well as about the investor and his projects.
Present the information in terms of the investor’s interest, not yours. That is, tell what exactly he will receive. But your story should be based on calculations and numbers.
Be flexible while negotiating terms. But at the same time, be able to say “no” when the values and proposals of the investor run counter to your opinion. At the same time, it is worth politely explaining your position.
Take responsibility for resolving potential trade issues. Meet your commitments on time. For example, at the end of the meeting, you agreed that you would send certain documents during the day. It is imperative to do this within the agreed time frame. Even such a small detail can ultimately affect the decision.
Be open about your project. Misunderstandings and reservations will make the investor doubt you. No investor will steal a business idea, the implementation is important to him, not the idea. Therefore, tell everything openly and your chances of getting an investment will be higher.
Show the investor your competence and the competence of your team. Prove that you understand the area of your project inside and out.
The main mistakes when communicating with an investor
In addition to the rules, there are also major mistakes that can reduce your chances of getting an investment.
- You do not understand the key metrics of your project or do not know any metrics. You should know everything about your project.
- Assigning not key employees to conduct the meeting with the investor.
- Changing the value of your company depending on how much money they are willing to offer you.
- To be ready to take any money that they offer, justifying it by the fact that you will find how to spend it.
- Using phrases: “We have no competitors”, “no one has ever done this before.” This suggests that the market was poorly studied by the authors of the project.
- Using incorrect wording when talking about competitors.
- Too nervous or, conversely, too self-confident.
Structuring the deal and signing the contract
Let’s take a closer look at what happens after you’ve managed to attract the investor’s attention. Everything that we talked about earlier in the article refers to the time when you tried to interest the investor. Let’s say you have found out how to get funds for a startup, everything went well and the investor is ready to sit down at the negotiating table. In general terms, we will describe how the transaction will proceed and how to attract investment to the enterprise.
Presentation / Pitch
The next step before attracting investment is to study your company. The investor will want to see your product, get to know the team. Then the negotiation process begins. You will have to assess the value of your company, determine what share in it you are willing to give up for attracting investment.
After you have interested the investor in your project, you will need to agree on the Term Sheet. This is a document outlining the key terms of the deal. Carefully study all the clauses of the agreement, amend them if necessary and coordinate them with the investor.
Then the investor proceeds to a detailed study of your company in all areas: product, finance, personnel, legal structure. If the result of due diligence satisfies the investor, then the project receives investment. This is a rather schematic description of what stages the transaction goes through. It is important to be prepared for long negotiations and discussions.
In this article, we studied the approaches to finding investors, project artifacts that you will have to prepare to attract investments, some tips on the negotiation process, and common mistakes you can avoid. Also, we paid attention to the deal structure. We hope that this article helped you to answer the question “How to Get Fund for a Startup?”. If so, do not hesitate to share it and check other our materials.