We asked several investors about what specific strategies entrepreneurs need to employ when raising capital for their business.
Most people who sent in their responses were experienced investors who had invested in several businesses or experienced entrepreneurs who had raised financing for their businesses in the past.
This is a list of some of the Strategies Investors Recommend For Raising Capital
1. Network, network and more network
Develop a relationship with the investor before you actually present your business plan. If you do not know an investor, try to get a referral from somebody. It could be friends, family, a neighbor or anybody. Try to get a referral from somewhere. A cold call is a really tough sell. I have tried cold calls in the past. The response has been not so good and besides it’s hard to get the right person on a cold call. Some entrepreneurs go the route of taking a merchant cash advance if they are in the beginning stages of their business. However, if you do have the opportunity for an investor to take interest, jump at the opportunity since it will more than likely get your business flowing.
Most entrepreneurs make the initial contact and then they forget about it. It’s important to follow up. It’s just like the sales process, you need to follow up without being pushy or being a pest.
Michael Rhodes, General partner at Syncubator says “Entrepreneurs justifiable are focused on their ventures but venture capitalists and angels vet hundreds if not thousands of opportunities simultaneously. Entrepreneurs need to learn the art of professional follow up without being pushy. There are techniques that entrepreneurs can deploy that will make them stand out from the rest. Hand written thank you notes go a long way. Follow up with the product sample, etc.”
These are simple yet extremely powerful networking tools that have been around for a long time. They are much easier to implement than getting a college degree.
3. Clarity and vision
Most investors believe when an entrepreneur presents his business plan he should be absolutely clear what his product is and how he plans to make money.
Pablo Solomon, famous for his art business says “The keys are honesty, clarity and vision. If you can communicate your vision in a clear and honest manner, you can interest investors.”
Robert M. Herzog, President of Robert M. Herzog & co who has helped early stage and start up companies raise over $150 million, including starting several of his own businesses in Internet, media, energy and other sectors besides claiming to have raised every form of capital and who is well versed in all forms of raising money says “Be very focused, you may have a million spin-of and secondary ideas in your head, but you have to convey very clearly how you will walk before you will run. Be clear about what you know, and admit what you don’t know, if you try bluffing through what isn’t known or in place, it will come back to haunt you.”
Carol Roth of Intercap Merchant Partners who has helped companies raise over $1 billion in capital and has invested in a variety of early stage companies says “Be crystal clear. You should be able to communicate what your company does and what customer need/pain point it solves in plain, simple language that a non-native English speaker can understand. You could say that you have “a device which uses various combinations of electrical circuits and mechanical devices to produce and control an output of energy waves to increase the temperature of edible items over varying periods of time” OR you could say that you have “a microwave, which heats up food quickly.” Go with the latter- investors have limited attention spans.”
4. Understand the process of raising capital
Lot of entrepreneurs have no idea about the process of raising capital. They have heard of stories of an investor just writing a check to a college kid at a dinner table. At most times, that check is usually written after months of due diligence and follow up.
So, they just show up at the the investor’s door step and they expect the investor to write them a check. That very rarely happens. In fact, it’s impractical to even expect it.
Kevin Castello, associate director of the Baylor Angel Network says “Do your homework first on Angel investors. Understand the basics of what you are getting into – the average person wouldn’t go to the bank without knowing what the bank loan process is likely to look like. Understand the valuation process: we will have to raise x amount of dollars which will cost us what percentage of our company.”
5. Realistic plan
Entrepreneurs are generally optimistic people and most of their projections are usually in the air. It’s wonderful to aim high and have big ambitions but at the same time there needs to be a foundation on the ground. And, that foundation needs to be grounded in reality.
Davis Jones, an entrepreneur who has launched businesses in real estate, internet, computers and health care and has negotiated several venture deals says “Be honest with yourself and investors, have realistic, conservative projections and don’t let your enthusiasm overshadow your objectivity.”
6. Plan to pay back investors
This is something many entrepreneurs don’t even think about. Even if they do, the numbers are quite unrealistic and don’t really work.
So, have a clear strategy and a very clear timeline as to when and how you plan on paying back your investors.
7. Make your business investor friendly or fundable
Sometimes, your business model needs to be in the range investors are looking for, besides fulfilling several other factors that make the business fundable.
Carol Roth of Intercap Merchant Partners who has helped companies raise over $1 billion in capital and has invested in a variety of early stage companies says “Make sure your business model is investor-fundable. Most business models aren’t big enough to attract the attention of sophisticated investors like angels or venture capitalists. These investors want to invest in businesses that have the ability to give them a 30% to 50% return (or sometimes higher) on their capital on average and for VC’s, that can become $50 million- $100 million in revenue in three to five years. This means that your business may not be a fit for an angel or venture capital investment. Venture capital firms only fund a fraction of one percent of all businesses in the US each year. Be realistic on whether you have a business model that is likely to scale quickly and be of interest to venture capitalists or sophisticated angel groups. If not, don’t waste your time going to them for funding – look elsewhere. If you do have a plan that meets the above criteria, try to get an introduction through someone who has a relationship. Spend time with your network seeing “who knows who”, as a direct introduction will keep you from the bottom of the business plan (or pitch deck) pile.”
Write down any questions you may have for investors in the comments section below.