Introduction
If you lead a start-up or an early-stage business, you should think of investors as a lot more than a source of cash. When you secure third-party investment, you are starting a relationship, not simply opening a bank account. Before you approach investors, it is a good idea to have a think about what kind of relationship you are looking for and, in doing so, you must be realistic about the investment potential of your business: are you a good catch?
You are more likely to be successful securing investment if you can get into an investment mindset before you start and working your way through the following questions will help you to do this:
- What does success look like to me?
- What are my skills/knowledge gaps?
- How do I feel about recruiting a senior management team?
- How many years am I prepared to commit to building my business?
- Do I really need a cash injection to get started? If so, how much, and will I need more cash injections over time?
- How difficult is it to do what I am planning to do?
While you are unlikely to address these questions directly in your business plan (it would be “too honest”), in conversation, investors will be trying to work out your motivation and whether they are happy to align with your ambition. It is important that you do the same.
Securing a meeting with investors
Early-stage investors are looking for deal flow and generally make themselves accessible. A warm introduction will help in most cases but don’t be tempted to delegate the process to a third-party “professional” fund-raiser – you are starting a relationship, remember.
While exaggerating how well everything is going might secure you an initial meeting, trust is key to building a successful investor/investee relationship, so honesty is always the best policy.
Most professional investors have well-defined, and publicly stated investment criteria. Don’t waste any energy trying to get investors to adjust their criteria so that they fit your business – you are unlikely to win the “your investment criteria are wrong” argument.
Having short-listed investors that you like the look of, find out as much as possible about them, their track record, the people in their network and their portfolio businesses before you contact them. Why are you excited to secure investment from them? Why should they be excited to invest in your business?
Negotiating a deal
Most early-stage investors provide both cash and “help” but there is a huge range in quantum of cash and quality of help available. Securing investment from any of your short-listed investors would be a success, so what is at stake in the negotiation? The negotiation should be about aligning interests, ensuring that all stakeholders are appropriately incentivised, and getting the investor/investee relationship onto a sound footing. It is likely that the key negotiation topics will centre on valuation and control.