Where can I pitch my startup? Who will fund us?
Those are the questions typically heard and occasionally, too rarely, someone asks the more valuable question, how do I figure out who will fund me?
Who will fund you gets the heart of an exercise far too few startups conduct; asking the question of whether or not what you’re doing is actually fundable. Are you fundable? Is it even worth talking to investors?
How do you know?
Let’s define a few things first.
- Funding
- Financing
- Capital
Most entrepreneurs are seeking “funding” but what does funding actually mean?
Funding is an amount of money provided by an organization or government on the basis of an agreement. It is usually free of charge.
Financing is an amount of capital (the sum of money) provided to an organization with the expectation to repay. Borrowers must pay back the capital amount along with an agreed percentage of interest.
The agreement in funding typically pertains to ownership, with investors, or the public good that a non-profit provides in seeking a grant. A great way to discern the nature of a conversation your having with an individual is to gauge their expectations by way of their focus. Are they seeking a quick ROI, pressuring for customers and revenue, or talking about bounties or being paid back – they are more likely offering capital but under terms more like that of financing, not funding.
I mentioned capital in my list and what is paramount is that you understand the need for and implication of the capital you’re seeking. Why do you need the money and what do you intend to do with it? Is it money so you can hire people? Capital to spend on advertising? Do you intend to invest in the business; developing a new market or technology? The plans for the capital you’re seeking often correlate with whether or not you are suited to funding or financing. Hiring to secure customers (who will pay you)? Secure financing. Investing in technology that will pivot the company to a new stage? Secure funding.
Catch that? Venture Fund Investors = Funding.
What is that you’re doing that is suited to venture capital firms and investors such that you should pursue funding? How do you know?
Start by distinguishing what you’re doing such that it matters to investors:
- That there is an opportunity for ROI at roughly 10x revenues
- That you have the team that will achieve that
- That there is a distinct problem to solve and that you can competitively do so
Most startups strive to seek venture capital without appreciating how venture capital investors really work. Which is to say, venture capital funds need to deliver returns to THEIR investors. They are not Angel investors (who want to purposely support your industry) nor are they banks offering working/operating capital to grow a good business.
They are portfolio managers, in a sense, who deploy capital into ventures only if that capital will be returned at a far greater rate.
Let’s take a quick step back as I neglected to define a few other terms; terms related to FUNDING. Now, take these with a grain of salt as many will want to disagree with me, arguing that they are suited to one group though I’m characterizing them as another. End of the day, consider this broad but fairly conventional generalizations and thus standards:
- Friends & Family funding – People you know who’s investment in you is essentially philanthropic. You’re likely to lose the money entirely and in doing so, they’ll still be your friend. This is where you start. Typically raising <$250k
- Startup Investor – Individuals who invest in startups but don’t behave like an Angel. Characteristics of these people are investors with wealth but not direct experience in what you’re doing. This is a VERY important distinction for you to make as an Angel Investor is a patron of your industry whereas someone investing in your company, may not have any understanding of it at all. Know their role and expectations as such.
- Angel Investor – An Angel, as the term implies, is there for you. They understand what you are doing and want to help. The most treasured Angel investors have either years of experience substantially funding many startups OR wealth generated through their work in YOUR industry. They know what they’re doing better than you do such that their investment in you isn’t just capital, it’s a substantiation of your work. More often than not, you’ll find such investors in CxO roles in innovative companies in your industry (i.e. potential acquirers)
- Angel Group – Groups. Duh. 🙂 Pools of investors. These can be local groups, industry groups, or virtual and online. Technically, many incubators are akin to Angel Groups as they are pools of investors. Important in talking with Angel Groups is appreciating that the individuals therein aren’t necessarily cut from the same cloth. Just because it’s called an Angel Group doesn’t mean the sources of capital therein, the individuals, all invest like Angels. Are you talking to a startup investor? Maybe it’s someone who works for a venture capital fund. Perhaps the individual prefers a convertible debt instrument – more financing-like. Know your audience.
From the above investors you should be seeking >$50k per investor; otherwise they probably don’t have the wealth to really develop a portfolio as such an investor and might better be considered a friend.
- Venture Capitalist – Food for thought that makes these definitions important… technically, anyone putting money into new ventures is a venture capitalist. Thus, it’s fair that anyone supporting you calls themselves a venture capitalist. Distinctly though, you might consider that a Venture Capitalist is someone who works for a Venture Capital Firm. See, I’m not an Angel Investor, nor a startup investor, but I work for a Venture Capital Firm. That’s important to note, in your search for capital, as I’ll not write you a check, but I am a source of capital. What’s different about talking with someone like me?
- Venture Capital Fund/Firm – In the context of this article we’re really focused on the class of capital source. Venture Capital Funds/Firms are organizations that pool capital FROM investors (typically known as LPs – Limited Partners). The General Partners, Principals, and Associates of such firms are managing the fund comprised of others’ money. That fund invests in your work and given the distinct role of a Firm/Fund, their expectations differ from the other groups defined herein.
Point of those definitions being, to reiterate so I’m clear, what matters less is what someone calls themselves so much as that YOU, in talking to THEM (US), understand THEIR expectations.
For MOST startups,“venture capital” isn’t at all appropriate – in the sense of the definition being a Venture Capital Fund Investor.
Consider what venture capital funds do and how they work. Can you deliver a substantial EXIT so as to deliver a return that offsets the losses they absorb through other investments?
- That there is an opportunity for ROI at roughly 10x revenues
- That you have the team that will achieve that
- That there is a distinct problem to solve and that you can competitively do so
Any gaps that you have in those three things, favors the other sources of capital be those angel investors, friends, OR financing.
Answer those questions
- If you can become a $10MM a year business, prove that you can get acquired for $100MM. If you can get acquired for $100MM, justify the investment you need and the return that will deliver relative to the respective ownership in the company the investor will take.
- Show that you can get there. Do you have the experience and skillsets that will all but ensure it? Investors don’t invest so you can hire the people that you need to actually do what you want to do. Can you do it such that you need the investment to accomplish something otherwise difficult or unlikely without capital?
- How are you not just a service? What is the intellectual property, product, and patent that solves a distinct problem in a way that distinguishes you from other providers?
If you can’t accomplish any of the above, you’re likely not fundable by investors. Period. Think about it… if you simply can’t accomplish the first point, why would any investor get involved??
Okay, how do I find the ideal investors?
Having worked through that, FINDING investors is actually far easier than it might seem. Depending on the capital required, relative to the stage of the company, you’re simply uncovering those that fund such things. Three sites become your best friend and your job as the founder becomes that of data scientist – constantly mining these sources for intel and information about the individuals that may have an interest:
- AngelList
Uncover the firms that have funded things in similar industries or applications. Uncover the wealthy individuals (CxOs) at related companies and seek out those who would have an interest in what you’re doing. Dig through industry news to find angel investors and thought leaders who support the space.
The “comfort zone”that investors will have with what you’re doing, such that they’ll give you valid feedback at your stage, and possibly invest, is defined by THEIR personal experience and YOUR ability to deliver an outcome. Match the one with the other and you’ll secure capital.
