10 Tips for Capturing Capital
By Chris Lynch
During the Internet boom of the ‘90s, investors were mostly interested in the potential of a company – even if that meant betting consumers would pay a premium to have 25-pound bags of dog food delivered to their door.
That – and many other ventures – turned out to be a losing bet.
These days nothing is considered a sure thing. If your startup isn’t on the right track or if you haven’t done your homework as an inventor and entrepreneur, then you won’t have much luck raising capital. Here’s what you should do:
- Know your investor: Investors typically are intrigued by companies that fall within current trends, but that is not always the case. A large pharmaceutical company, for example, may be more interested in a small biotech startup that shows potential to produce a new drug that they can’t produce themselves. Different angel and venture capitalists are looking for different things and most have a track record of the type of company, and even rate of return, they are looking for. Do your homework and know who you are pitching to.
- Know what they like: Investors want to see that your product/service not only fits a market, but also stands out among the competition. Without proper market research, a unique selling proposition and a solid marketing plan, investors will be wary about investing in your idea. If you haven’t put research and planning into your product, don’t expect someone else to fund it.
- Focus on creating a first-rate management team: If your management team is uneducated about the product and its market, it poses an outsized risk to potential investors. A favorite VC saying is, “Investors would rather have a second-rate product with a first-rate management team than a first-rate product with a second-rate management team.” A first-rate management team will know how to turn the product around.
- Have a great pitch: Your pitch should be short, straightforward and clearly articulate the value proposition of the company. Start with a quick elevator pitch that should include basic information on the product and its market. Imagine you are with Bill Gates or Warren Buffet and you have 60 seconds to sell your idea – create that pitch.
- Have a great presentation: After your pitch, include a visual presentation to go into further detail. Keep it simple. Don’t use too much text. Investors are interested in how they will see a return on their investment. The better they can visualize this, the better your chances are for getting investments.
- Stay Focused: Be approachable and on target with your key points. Remember, you’re not just selling your company; you’re also selling yourself. If the investors do not leave with a clear understanding of what you are proposing, then you haven’t communicated with them very well. Highlight your strongest qualities – including your management team – and communicate in a clear and precise way that you are open to their ideas and even coachable to learn new things.
- Get some cash flow before raising capital: Show potential investors that your product or service has already produced a little capital. It will speak volumes of your likelihood for success if you can show that you already have paying customers or a positive cash flow.
- Think realistically: Different venture groups will have a different rate of return based on the type of investor. For companies dealing with life sciences, they will have a longer development cycle for generating cash flow and will often require types of funding such as research grants. Know your market: how big it is, who the competitors are, how you are differentiated. Know your customer base: who they are, what pain point you will solve, what they will pay. Otherwise you risk building a product for yourself and not for the market. Know your business model and find an investor who is familiar with your industry.
- Use your resources: The Internet is full of resources. There are inventors groups (find a list at the back of this publication), business coaches, matching services, university classes, local angel groups, business incubators and entrepreneur forums with strong education programs and workshops that are open to the public. SCORE.org is a national organization of retired executives who help fledgling companies. Try speaking or networking with other successful entrepreneurs; this will give you access to firsthand experience of what works and what doesn’t.
- Learn from your failures: The biggest mistake you can make is to not learn from your mistakes. Don’t expect your first pitch to land you funding. Like anything else, learn from every situation, continue to practice your pitch and strategy and keep moving forward.
Editor’s note: This article appears in the April 2011 print edition.
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