Despite the fact that there’s more capital available to seed-stage startups than perhaps at anytime in history, it’s still not easy to raise startup seed capital. Fundraising can be complicated and tricky, particularly for first-time founders who have never had much exposure to the process before.
Doing all of the above outside of a traditional startup community like Silicon Valley — and, instead, in a place like Cleveland, Louisville, Chattanooga, or any other nascent startup community — can be even more challenging.
The following seven pieces may apply to anybody that plans on raising capital, but are especially useful to those raising capital outside of Silicon Valley:
Investors don’t just invest in ideas. In fact, the days of anybody purely investing in an idea are pretty much over. Investors need to see more than just ideas and research. They need to see that you’re able to actually build something on your own. It doesn’t have to be a full-fledged product. Even creating a beta version or prototype (or even just mockups) shows that you’re more than just talk. Investors can begin to see the potential for what your product will ultimately become. If you’re not technically-inclined and can’t create these things on your own, then find people that can. Hire them as a contractor or bring them on board as a full-fledged partner. While this isn’t easy, getting people to buy into your vision is a necessary step. If you can’t do it, investors may question whether you’ll be able to do the same with future employees or customers.
Become a leader in your own startup community
Investors may not invest in ideas, but they do invest in leaders. If you’re in a smaller, less-established startup community — you actually have a much better chance to establish yourself as a leader in your startup community than if you’re located in a more established community. Take the time to get to know other founders in your community. Figure out ways that you can help them. Help organise and plan events where startup community members can gather and share ideas. While it may seem counter-intuitive to spend time helping other people and not on your own startup, when the time comes for getting an important introduction to a potential investor or business development partner, you will have built a community of allies that want to help you. And when potential investors ask around for feedback on you, they’ll hear about how you stepped up as a leader in your own community.
Think beyond your own geography
Founders in a specific startup community are quick to believe that their pool of available investors is limited to where they live. And sure, investors at the seed stage do often like to invest in close proximity to where they live and work, but this isn’t the case for everybody. In fact, there are many investors that like to invest in certain sectors and are really location-agnostic. It could also be true that the people who have the most direct experience in the type of business you’re building simply don’t exist in your community. For instance, if you’re building a consumer internet company in Cleveland, Ohio — you won’t find too many others who have built and scaled similar companies to mentor you. By having your blinders up and only focusing on local investors (and even advisors and mentors), you’re quickly closing off an important group of people that can actually help you.
Be deliberate with the type of investors you bring on board
If you do start to think outside of your own geography, where do you start? There are thousands of investors scattered all over the country. Should you just focus on the big names — Mark Cuban, Chris Sacca, and the like? It’s true that influential investors can have a big impact on convincing other investors to follow. But let’s face it, unless you have a direct connection, landing a “brand name” investor is a difficult proposition. You should, however, build out your own “dream team” of investors. Think about the investors that can actually provide you the insight that you need. Perhaps that’s an investor that’s started a business similar to yours. Perhaps it’s an investor that has connections to downstream capital that loves investing in your industry. Whatever is important to you, write these traits down and look for investors that possess them. This is where you start.
Use tools that are available to build relationships
You may be able to create a list of the traits that you’re looking for, but how are you supposed to find out who possesses those traits? How can you even get a hold of them? The good news is that even if you are in a small startup community with few major players, there are so many tools available at your disposal to help you identify and, even better, build relationships with investors. Use LinkedIn’s Advanced Search function to find people who use “investor” as a key word in their profile along with other industry-specific keywords that you’re looking for. Use AngelList to find out which investors have invested in businesses analogous to yours. Don’t use LinkedIn or AngelList to reach out to them, though, you generally won’t see a great response rate here. Instead, go back to LinkedIn and find out who you have a common connection with. If you have a common connection, find out if they’d be willing to make an introduction for you. If you don’t have a common connection, see if you have any common connections to a founder in one of the investors’ portfolio companies. Reach out to this person and get to know them a bit. Later on, this person could perhaps facilitate the introduction. And if all else fails, don’t be afraid to communicate with them without that introduction. Most investors say that their investments usually come from introductions but it can’t hurt to reach out directly. Email addresses can usually be found after some time hunting and tools like SellHack can help you quickly locate a direct email address. You can also use a tool like Twitter to begin interacting with them now. This way, when you do reach out, you may actually already be a familiar name to them. It’s actually not uncommon these days for investor relationships to actually start on Twitter.
Understand investors’ motivations
Remember that investing in your business isn’t charity work. Yes, it’s true that many angel investors like to know that they’re making a difference in somebody’s lives and some even take on a mentor role, but they’re still investing because they think your business is an investment worth making. Understanding how each investor defines “worth” is important. For some investors, they expect a 10x return. Others take bigger swings and hope for 100x returns. If the latter is the case, this means that an investor expects their US$100,000 investment at a US$3 million valuation to ultimately return US$10 million back to them in an exit scenario where the company is valued at US$300 million. If you don’t ever see your business being valued at anything more than US$50 million (which, let’s face it, would probably still be awesome) — it makes no sense to pursue the 100X investor at that valuation. Every investor is different. Take the time to properly research an investor as best you can before approaching them.
Know your numbers
You don’t have to be a former CFO or quantitative genius in order to talk to investors about your business but you do have to understand your business model well. Investors generally don’t care about seeing fully baked-out three-five year financial plans. What they care about is how your business actually works. What are your key assumptions you’re making with your business model? What is the size of the market you’re operating in? What is the cost of acquiring a customer? What’s the lifetime value of that customer? These are conversations that you should be comfortable having when talking to investors. Particularly outside of Silicon Valley, understanding the specifics of your business model (i.e. how will you actually create value and make money as a business?) is a must for most investors.
Commit to the process
Fundraising takes time. In some ways, the process is similar to enterprise sales. The cycle can be long, and in some cases takes a year of relationship building before anything happens. Then again, sometimes things click quickly when you find the right investor. Regardless, treat the process with the respect it deserves. Dedicate an adequate amount of time to it. Usually, this ends up being at least 50 per cent of your time once you’re in clear fundraise mode. But even before that, spend time getting to know them — whether it’s in person or even if it’s just communicating on Twitter. Track all of your communications — potentially even in a CRM platform — just as you would if they were a customer. Know that for most people outside of Silicon Valley, a US$1 million seed round that took a week to raise after making a simple AngelList profile live is a myth. It can take months, if not longer, to adequately build relationships and find the right investors for your startup.
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