This is the second part of the series on how to win an investor’s heart. In the first article, we talked about how to build a business from scratch in a way that its structure and basic parameters encourage, rather than discourage, investment. Read about it here.
The Ideal Partner, What Does That Mean?
We’ve analyzed the nature of our project and the need for capital, as well as the availability, costs, and other conditions of various forms of financing. These analyses led us to the unequivocal conclusion that the best or most profitable of the available forms of financing for our startup’s further operations is to raise funds from a venture capital fund. So the next question is: which fund will be the best candidate?
When developing a list of potential investors, one should consider the specifics of the project being implemented and the funds’ preferences regarding the company’s location and sector, investment size, or project advancement level. A pre-seed phase fund investing in companies without revenue won’t invest in an advanced development company with significant revenue. And vice versa – a growth phase fund won’t even look at companies that don’t record any revenue.
Attracting investors can be planned on a large, even global scale, but it’s worth being aware that very young projects have a better chance of securing investment from domestic investors than from foreign ones.
Where to look for funds that are potential investors? On the internet, of course. Lists of investment funds can be found, for example, on the websites of PFR Ventures, PSIK, or Crunchbase. It’s also worth looking through articles about recently made investments (e.g., on Mamstartup.pl) and browsing news and fund profiles on LinkedIn.
How to Reach an Investor?
Having a list of potential investors, we can develop a plan to establish contact with them. In an ideal situation, of course, we already have them in our network and can now use this acquaintance. However, if we need to build this network first, it’s worth considering such forms of reaching potential investors:
- Participation in conferences and competitions for startups: this allows establishing personal relationships and “showing yourself” to many investors simultaneously.
- Finding a common contact who would be willing to “make an intro”, i.e., introduce the company to the investor. Such an introduction by a mutual acquaintance provides good credibility and increases the likelihood of a positive approach to the project, and as a result – a positive decision.
- Cold mailing, which may evoke negative associations for some, but unjustly so. Many investors perceive such actions neutrally and don’t leave them unanswered – after all, searching for potential investment targets is the basic activity of every fund.
Pitch Deck, or Presenting the Project
When contacting potential investors, we should already have a pitch deck ready, i.e., an investor presentation. We wrote about what it should contain in this article. In short, in a pitch deck, every investor expects to find key information about the company, its achievements to date, and development plans, including:
- Introduction of the management team
- Description of the problem customers have and how the company’s product solves it
- Information about the size and segmentation of the target market
- Analysis of competitive solutions
- Business model
- Summary of traction, i.e., the company’s achievements to date
- Development plans and financial projections
- Information about the investment round and planned use of raised funds
It’s important that the presentation is concise (max. 12 pages) and understandable to people who are not necessarily specialists in the field.
Talks with Investors – How to Prepare for Them?
The answer is: thoroughly. You have one chance to make a good first impression and you need to make the most of it.
It’s worth practicing presenting the pitch deck. A good idea is to test different slide orders – this helps achieve fluency of speech to a degree that allows showing investors that we are experts in our field, composed, confident in our knowledge and the correctness of our concept.
It’s worth inviting team members to participate, asking them to take on the role of investors and ask difficult questions. The harder, the better – it’s better to be thrown off balance during a trial than during the target presentation, and confronting difficult issues will allow practicing emotional control and stress management in situations where the conversation goes in a direction we’d prefer to avoid.
As part of preparation for the investor presentation, it’s also worth:
- Developing a list of difficult questions and answers for each area of the business plan,
- Preparing documents that investors might ask about – e.g., historical financial results, organizational structure, customer list,
- Refreshing the company’s financial results and KPIs, as well as current data important for the organization, such as names of recently acquired customers or number of employees.
In the process of talks with investors, it’s important to maintain an appropriate pace and order, so it’s worth keeping a register of contacts with all investors. You can use a dedicated tool for this, such as Pipedrive, but MS Excel or Google Sheets are also sufficient. It’s important to register every event on an ongoing basis, respond to follow-up questions as quickly as possible, and politely (though consistently) urge investors who are slow to respond.
We did it! We have it! That is, an investor who confirmed their interest and willingness to engage in the project. So, ahead of us is one of the last stages, namely establishing the terms of the transaction and agreement. The most important of these are:
- Investment amount and possible conditions for further tranches,
- Number of shares the investor will receive in each tranche,
- Investor’s expectations towards the company’s management,
- Rules regarding company management and supervision,
- Rights of each party,
- General conditions of possible forms of company sale in the future.
Key arrangements in each of these areas are described in the term sheet, a short, non-binding summary. It’s worth taking the time to discuss and establish them between the parties as precisely as possible, because based on the term sheet, as a result of further negotiations, an investment agreement will be created. This is often an underappreciated element of the process, and yet the more issues are established at the term sheet stage, the fewer arrangements, stresses, and risks of transaction breakdown will be later, when the topic will be a much longer and more complicated investment agreement.
Only after negotiations (and in more advanced projects – also after the investor’s due diligence of the company) do investors sign an investment agreement with the company. We’ll talk about the contents of such an agreement, as well as further steps taken as part of the company’s cooperation with investors, in one of the upcoming articles.
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