How To Attract Investors To Your New Business
By Cynthia Kocialski
It’s every entrepreneur’s dream … to have investors beating on your door, cold calling you on the phone, all begging to give you money so they can be a part of your success story.
If you can imagine it, you can create it or make it happen. So why doesn’t this happen for most entrepreneurs?
Only 1% of business proposals ever receive funding from investors. The truth is most entrepreneurs eliminate themselves from funding. They don’t understand investors and they don’t know what investors want from start-ups.
Let’s step back for a moment. If you are creating a new business, you have to create a product that customers want and are willing to pay for. It’s simple. Investors are just another type of customer of your start-up and like any customer, you have to give them what they want to buy (or invest in). The funding process is yet another sales process. Most entrepreneurs don’t look at funding from this perspective. They start by trying to convince the investor of the worthiness of their product concepts. They want them to fall in love with their new wiz-bang gadget. They are ‘pushing’ what they have to sell on the customer. It doesn’t work for customers, and it doesn’t work with investors.
So what does work to attract investors?
The first misconception entrepreneurs have is that a start-up is about the product. It’s not. It’s about the business of the product. The product is important. It’s the heart of the start-up – and a human being is more than just the heart. Entrepreneurs need the business model and every other aspect of a business to accompany the product. Investors fund businesses, not products. In fact, investors only attribute about 10% of a start-up’s success to the product itself. First rule of attraction, tell investors about the business of the product, don’t focus on the product.
A stereotypical profile of an investor is someone who is a big risk taker. They’re not. Early stage investors are in the business of failure, most of their investments never reach their expectations, and most are just losses. As a consequence, investors are naysayers. They don’t look for reasons to invest; they look for reasons to not invest.
Investors want proof of concept. Even the phrase causes confusion. When investors say it, entrepreneurs with technical or skilled backgrounds think about building a prototype of the product. However, investors want business proof of concept – and that’s proof of customer demand and proof of revenue.
Now let’s look briefly at why investors don’t invest. The biggest success factor is the team. Do you have the right players on the team? Do they work well together? You wouldn’t believe in a football team with an offense, but no defense. And you won’t bet on a football team with five quarterbacks and no running backs. Your team is more than just employees. It’s also advisors, suppliers, and mentors. Do they make sense? Are they really benefiting your company or are they just names on paper? As a brief point, investors view your team as an early indicator of sales. If you can’t identify and convince the right people to join your team then investors don’t believe you can attract and convince potential customers to buy your product.
Investors feel it’s an entrepreneur’s responsibility to demonstrate that their start-up can achieve their expectations of return. A complaint often heard by investors is entrepreneurs believe ‘getting funded’ is an accomplishment. From the investor’s perspective, ‘getting funded’ means the entrepreneur has taken on an obligation to perform under pressure.
Here’s a last tip. If you are turned down for funding, ask investors why and follow up with a question as to what milestones or goals you would have to reach before they would consider your start-up fundable.
When you seek funding, consider this. Venture capitalists and angel groups fund around 5,000 start-ups each year, which means they are presented with 500,000 proposals each year. My local library branch has 150,000 books on its shelves. It’s as difficult for investors to filter through all those proposals as it is for you to pick out a great book to read at your library. Think about how you chose a book from the library or from Amazon.com, and imagine an investor doing the same with a business proposal. Yes, we do judge books by their covers. So ask yourself, if all you read was your executive summary or heard your short pitch, would you be interested in your start-up or would you just move onto to the next proposal? When it comes to funding, every other start-up is your competitor – it doesn’t matter whether they operate in a different or the same markets. How would it compare to the other proposals?
About the Author
Cynthia Kocialski is the founder of three start-ups and helps entrepreneurs transform their ideas into new businesses. Cynthia is the author of Startup from the Ground Up and Out of the Classroom Lessons in Success. Cynthia writes regularly at Start-up Entrepreneurs’ Blog and provides in her video series information on getting funded.