1. Understand your business. It sounds obvious, but the majority of entrepreneurs who pitch me have obviously never thought through many of the major issues surrounding their companies. You should know EVERYTHING about your business, product, customers and competition. You should know every metric regarding customer acquisition, conversion and retention. You should have a crystal clear understanding of your business model and your financials. And all of this should be at the tips of your fingers so you can instantly answer any questions you are asked about it.
2. Understand what investors are looking for, what they usually invest in, and why. There is a vast gulf between a ‘cool product’ and an ‘investable company’ and if you don’t understand the difference, you will be doomed before you start. There are many good books on this subject, and you owe it to yourself to read at least one of them before you begin talking to angels. A good beginning would be my book, The Startup Checklist, available here. And if you want to deep-dive into the minds of angel investors you can read their secret playbook (which I also wrote!), Angel Investing, available here.
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3. ONLY after you’ve completed #1 and #2 will you then be ready for capital to be applied to your venture. And that capital is going to come from…YOU. That’s right, you should not even consider trying to raise money from anyone else until you have reached deep into your own pocket. This is the case for two reasons: first, because the bare fact is that investors simply do not fund ideas. The expectation is that in an era of increasing technology and decreasing costs, you will be bringing them an operating company with at least some traction. Looked at from their perspective, given two teams equal in entrepreneur, market, business model and potential, why should they invest in one that exists on paper, when the other has reduced its risk and improved its viability by actually getting started? The second reason is that investors want to know that YOU believe in your own startup…and the best way for you to demonstrate that is to show that you have personally put your own money where your mouth is. Keep in mind that any cash you put in will remain in the company as Founders’ Equity, and will only come back to you on a successful exit in which your investors make money. Note that the important thing here is not how much money you have invested, but rather how meaningful that investment is for you personally. Investors don’t expect you to fund at the same level they do, but they want to be sure that your venture is at least as meaningful to you as your next vacation, or fancy car purchase.
[3a. Although it is not required per se, and therefore is not being given its own discrete step here, in the real world most startups at this point manage to have raised some money from somewhere before they reach out to professional investors. Historically, founders have turned to friends and family for additional capital, in the form of equity or loans, to help get the company to a stage at which it is legitimately investable by third parties. These days, when not every founder has family or friends with economic resources, their first small funding is often called a “hustle round”, indicating that you will hustle to get it from anywhere you possible can: advisors, colleagues, grants, bootstrapping, friends of friends, business competitions…wherever. The important thing to note about this is that the money should either go into the company directly as a SAFE or convertible note without a cap, or (depending on the personal relationships involved) as a personal loan to the entrepreneur, which he or she in turn invests as equity into the company, but will be responsible for repaying even if things don’t work out.]
4. With #1 – #3 under your belt, you should start preparing the components you will use to support your pitch to outside investors. These range from outbound materials, such as pitch emails and funding applications, to presentations of your venture in different forms for different purposes, to detailed back-up information that you will be asked to supply during due diligence. A comprehensive list of things you might want is listed in The Startup Founders’ Pitch Toolbox, and these can all be neatly gathered into a confidential investor relations site, such as you can create with Gust.com.
5. Now, and only now, are you prepared to start fundraising. This phase is a combination of (to mix several metaphors) WMDs and sniper fire. Start by letting absolutely everyone know that you’ve got a great startup looking for early investors. And I mean *everyone*. I have been led to deals by my barber, my interns, my cousin and my high school classmates. If you hide your light under a bushel, investors simply will not come looking for you proactively. At the other end, do your homework to really understand which investors would be the most productive for you to approach. Some only invest in their home city, others only invest $5,000, still others only invest in biotech, for example. Blindly sending your business plan to every single angel and VC in the world will have zero effect, and simply clogs the system while annoying everyone. Therefore, make it a point to carefully and comprehensively research potential investors, with the goal of determining their investment thesis. A good place to start is the database at NFX Signal (for individual investors).
6. By all means do not neglect applying for funding from your local business angel investment group. There are many hundreds of these across the country and around the world, and virtually all of them accept applications over the transom. If you are invited to come in, even for a preliminary screening, you will have the opportunity to present your business to experienced investors. This will give you both pitching experience and usually solid feedback on your plan. And if you do get funded, the group can be extremely helpful in getting other investors to join in with additional funds. The best resource to search for angel groups is right here on Gust.com.
7. Another avenue that is increasingly a good idea is to consider applying to one of the new breed of accelerators. While the best known ones are yCombinator, TechStars, 500 Startups, SOS Ventures, and DreamIT!, there dozens of others, local, national and international, many specializing in specific areas (including fashion, food, finance, gaming, etc.) Accelerators typically provide several months of intensive mentoring, at the end of which they host a Demo Day to introducing all their graduating companies to a large number of local angel investors. Once again, Gust.com is a great source for finding and applying to accelerators and similar programs.
8. Your goal in all this is to try to find a lead investor. This person will be critical in rounding up other investors, drafting a term sheet, and generally getting the deal done. He or she will be your primary champion, and often mentor. Doing a deal with a lead investor is three to five times easier than trying to pull everything together by yourself. Among other things, your lead can vouch for you with other investors in their circle, or who follow them on online financing platforms, which can be a good way to finish up a round (via “social proof”) once your leads are in place. Most importantly, they can help set a legitimate valuation for your funding round, validated precisely because they have shown that they are willing to write a check at that number.
9. Before you start negotiating a term sheet with any potential investor, you should take one of two paths: either use a respected platform like Gust Launch which will manage the whole process for you using industry-standard documentation, or else make sure that you GET A LAWYER, specifically, a lawyer with experience directly in the early stage financing world. This will NOT be your family lawyer, or the one who helped you beat that traffic ticket. There are excellent venture lawyers in every major city, with enough to form a flash mob in places like California, New York and Texas. For more background on this key step, see the answers to “What should one look for in a startup lawyer?”
10. Finally, from the minute you begin engaging with an investor, it is critical to COMMUNICATE early and often. Keep them up to date while circling your round, thank them as soon as it closes, and provide ALL your angels with either quarterly (at a minimum) or monthly (ideal) reports on how the company is doing. In my experience there is an astounding correlation between frequent, thorough communication and successful follow-on funding. And once again (surprise!) your private deal room that is part of your venture’s profile at Gust.com is a great way to keep all your investors up to date.
*This original post can be found on David S Rose’s Quora*
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This article is intended for informational purposes only, and doesn’t constitute tax, accounting, or legal advice. Everyone’s situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.