How to navigate the investor market place and get the answer you want.
You’ve probably already met this person – the intrepid entrepreneur with a brilliant project, a ready to develop prototype with a well-researched proposed route to market. They have invested cash, sweat capital and a large amount of their partner’s goodwill getting to this stage, but no matter how much time has been spent sending out proposals and taking part in pitch presentations, they don’t seem to be any closer to get that all important seed investment.
There could be many valid reasons for this, but one that we’ve seen time and again at Practical CFO is where entrepreneurs are having the right conversations with the wrong people.
Beginning your investment journey
All entrepreneurs needs to start their investment journey with the mindset that the investment market is a marketplace just like any other. When you’ve been developing your business idea, you’ll have developed a very good understanding of your market, your customers and your competitors.
You’ll have researched what is important to your customers, know how much each is prepared to pay for your product or service, understand where your offering sits in the marketplace and who your competitors are. You’ll have spent a lot of time defining your perfect customer.
Searching for investment requires exactly the same approach: careful analysis before you start is essential. The first task will be to find the right investor for the stage of investment you’re currently pursuing.
Just as with your customers, investors can be segmented by market and by ‘spend (investment)’ size. Some investors concentrate on seed funding, while others focus on Series A and beyond. Many have market specialisms or a particular regional focus, some are sector agnostic. When looking for funding, you’ll need to understand how the market is segmented.
Do your research and proper preparation
You should also research the investor’s approach to investing and the support they may give as you grow your business. Some funders are very hands on and expect to take an active role in growing your business, others are content to have only have Board representation. This aspect of post fundraising involvement is often overlooked; when you partner with an investor who is experienced in your sector and fully supportive of your goals, you gain not just money but a valuable business resource. However, you need to take your own temperament and preferences into account and add this to the criteria when you’re looking for in an investor.
That’s not to say that you should get misty eyed and romantic about your possible investor. After all, their goal in investing is to make a return on their investment. When engaging with you, they will require information on the size of your market; can you build the product/service your pitching; how much you will charge; who’s on your team; and what do you know that others don’t.
Your initial pitch deck should provide this information, but not in too much detail. An overlong powerpoint presentation may result in a good idea being overlooked because the potential investor decided to bite of their hand rather than continue to plough through it….
Understand the expections of different funding rounds
That aside, as an investee you’ll also need to be clear of the expectations and deliveries of the funding round that you’re pitching for. The Seed round requires a high level business plan, details of how much cash will be needed at this and later rounds, what you will do with the funds you receive and what 2 or 3 alternative scenarios look like.
Experienced investors know that at this stage you will be developing the prototype, or testing the routes to market at this stage, and that your plans may have to adapt and change. They also know that you may need more funds fairly quickly and often like to get an idea of what that may look like so they can include it in their future planning.
When you’re ready for Series A funding, investors expect a much more detailed business plan, one that defines the known and the unknowns and the strategies you’ll adopt to manage them.
Series B and beyond require good quality accounts, experienced business functions, a proven product and route to market and the ability to effectively deploy any funds received.
So, it’s very likely that our intrepid investor may have been unsuccessful in their fundraising efforts by not being strategic and has been having the right conversations with the wrong people. You would never invest your time chasing customers who don’t fit your target markets and the approach to investors should be exactly the same. There’s no point approaching an A round investor for a seed round – it’s a conversation you can never win.