*The following post is based strictly on my experiences and opinions as an entrepreneur and startup founder and can and should be used only as such.
Recently, my partner, Kami Duck and I, began raising our Seed Round of funding for our startup. As this is our first startup, there is much to be learned and we have done just that. In the process, we have obviously spoken to and pitched to multiple investors. What we have learned thus far (as it is still very early), may be very beneficial to many first time entrepreneurs such as ourselves.
The Big Three
This type of Angel Investor wants a clear understanding of how you make money, when you make money, and what his/her money is going to do for you and for how long it will last.
Based on the experiences of our startup, being a web/tech startup, a traditional proforma is hard to develop. We spent countless, frustrating hours trying to put together a traditional proforma. Months ago we worked on this but never managed to “fit” the criteria. But what we’ve learned has proved to be very valuable.
For this type of Angel Investor, you need to prove that you understand cash flow. Albeit, all your numbers are going to be assumptions (THEY KNOW THIS). This gives them a metric which allows the investor to judge your management skills, operating habits and your financial understanding, as well as grasping the actual potential of your company in terms of revenues.
*Suggested read on projections for your startup: http://ow.ly/18r0xx
1. Find a metric to base your growth on. You may have the most unique product out there, we all do, but there is a product out there that is somewhat similar and can be utilized to serve as a metric for growth. Hard to swallow? It is the truth.
This took me a little while to understand because in some spaces, it is just a lot more difficult. Be a detective; search, search, and search some more. There is a lot of data out there which you can take advantage of. If you can not find anything, ASK someone who may know. There are many, many entrepreneurs out there who are willing to help other entrepreneurs. I credit a lot to those who I have met and built relationships with along the way. Think Collaborative.
2. Define benchmarks. At what point do you consider a mission accomplished. Is it user gain? Revenue gain? Development? Partnership? Break-even?
3. Define how you are going to make money. Believe it or not, but investors are investing in you so that they can make money. Because of this, you will need a business model that allows you to generate revenue. Will it be free, freemium, or premium? How much money will you charge? This again is an assumption as it most likely will change before launch.
4. Define when you will make money? While this is a benchmark, it is something that deserves extra attention. Do you offer free trials? Do you start out completely free with no strings attached, then bust your consumer in the chops with a premium? You at least need to understand the scenarios and their implications.
5. Have a good idea or at least logical idea of what it is going to cost you/your company to operate and to reach the above benchmarks. You will not get this exactly right. Salaries are definitely something you will run into problems with. ASK other entrepreneurs, read blogs, talk to mentors. Project costs that are essential to you reaching your benchmarks. A good investor will make suggestions and tell you that you need more money if you truly do. They want you to be successful. After all, they are investing in you for the return.
Brief Break Down Bill:
With this Angel, you will need something sort of like a grocery list for your startup. While “Brief Break Down Bill” wants to know everything “Proforma Pete” wants to know, he/she is confident you have already thought about that and have it. He/she may ask at anytime for all of this information, but right now he/she only focuses on the “grocery list.”
The “grocery list” is a brief breakdown of everything “Proforma Pete” asked for. This allows for the investor to have a knowledge that you understand how to make your idea a company, how you will manage it and how much money it is going to take you to get there without going into detail.
At this stage, your idea, concept or product has more leverage than it did with “Proforma Pete.” This allows for more of the discussion to be about vision, which is always exciting.
Just an Idea Jeffrey:
This Angel either trusts that you have all of the business strategies under control or just has money to take a “leap of faith.” More likely it is that they think you have an awesome idea (or you at least convinced them that you had an awesome idea; either way kudos to you and your sales skills) and are willing to take a “leap of faith” with money they can afford to lose if it doesn’t work out. These types of investors are harder to find.
When preparing for this investor, the idea is your deadliest weapon. Make sure its a great one, well thought out, and know all of the above to further solidify your position and vision. Just because the investor you are pitching does not require your knowledge of the complete business strategy/model, does not mean that you as an entrepreneur do not need this information.
Each investor is a different animal and most of the time you’ll be unaware as to what type of animal they may be. Until you are thrown into the cage of course.
On our funding trek we have had opportunity to meet with all three types thus far. The wonderful thing about this has been the learning process. It has also been rather confusing and stressful at times.
When meeting with investors for the first time, you come away learning so much. You refine, refine and refine, confident that you are going to blow away the next investor because you now KNOW what you have to have. Wrong. You meet with the next investor, only to find he wants the exact opposite. You refine, refine, confident that once again you are going to blow away the next investor because you think after critiques from two investors, that you have to have it this time. Wrong. The third investor doesn’t want any of the things the first two investors wanted.
While all meetings are successful in some manner or another as well as allow you to keep progressing forward, you still feel that you can improve, refine, improve, refine and by the next time, hit one out of the park.
This is where my point comes:
Be prepared for all three scenarios. Just because you are prepared for all three, does not mean that you throw all your cards on the table at once. I have also had a problem with TOO much information. It was all good data and content, but wading through it all proves exhausting for an investor. Most investor meetings are said to last 15-30 minutes if you are lucky, longer if they are interested. Ours have lasted on average, 2.5 hours. This means you have to feel out the investor quick to know what route you take. Throwing down the wrong card does not mean you lose, it just means that you have wasted 5-10 minutes of the valuable time while the investor sat clueless or in deep thought as to what was missing or while he was wading through the content.
You are very intelligent or you would not be in similar situations to these. Use that intelligence and get the most out of the time you have with the investors. Be prepared.