Startup Basics with Milan is a series that provides you with a framework to start your own startup. Even though I believe that customers are the best investors, many startups need to raise money from angel investors or venture capitalists in order to be able to grow fast and keep the pace of its competitors. The most of the questions that I get from the founders are about the investors. Even though finding an investor can’t be the main focus for an early stage startup, I’ve decided to start the series with that. It will help you understand what is the real priority for you.
As soon as you start working on your idea, don’t forget to start building relationships with investors. It might seem that it’s too early. It’s never too early. The reason why is that investors invest in people, not in ideas. Even though it may not look like that. They need to see that you are passionate about solving the problem, capable of execution, learning from your own mistakes, improvising, managing, adapting to change, and the whole other bunch of valuable qualities. And they need to trust you and believe in you. This usually doesn’t happen in a day or a week.
There is one investor whom I really liked as a person and wanted to raise money from for one of my startups. I worked on getting introduced to him and started building a relationship as soon as I spotted his VC fund. Unfortunately, we weren’t in the right stage for them, so he didn’t invest in us. However, I kept following him on social media, updating him on how we were doing and made sure to say “hi” every time we met at some event. That’s how relationships and trust are built. It doesn’t appear overnight. You have to invest time, your most precious resource, into growing the relationship with your potential investors.
Who is an investor?
For the sake of your fundraising effort, an investor is your customer. He has to buy your idea and fall in love with it (or with you as a passionate, capable and bright founder). Therefore, you need to invest your time in understanding who your investor is and what is happening in their head.
Angel investors and venture capitalists.
There are businessmen who are investing their own money (mostly former successful startup founders or entrepreneurs), and we call them angel investors. Then there are managers who are in charge of investment funds that invest someone else’s money, and we call them venture capitalists or VCs. The first group have the entrepreneurial experience, and they are like you, but many levels ahead. The latter are financial managers who maybe never founded a business. Now, if you want to conquer the hearts of either of the groups, you have to wonder, what is their motivation to invest money? Of course, it’s the return on investment. Money talk.
The investors, as I mentioned above, invest especially in people and teams. Because if they find an excellent team with an average idea, they know that the team can make it work and turn the idea into a very profitable and growing business. A couple of investors I know told me that it’s really hard to find a responsible and motivated team.
Where to find investors?
Because investors are looking for startups to invest in, they usually attend pitch contests, meetups, conferences and other startup events. They participate as sponsors or speakers in hackathons, too. They are often wearing name tags with the “investor” label on it. So go to these events, as well, and talk to them. If possible, have someone introduce you to them.
How can you approach an investor?
You can always cold email investors through LinkedIn, Twitter or their website. However, you should realize that there are MANY people and startups doing the same. That makes you “one of the millions”, and it’s very likely that the investor will not have any chance to reply to your email. Therefore, your cold email will have to be really unique, and the few sentences will have to spark the investor’s interest. This is not that easy, especially when you go after well-known investors with a very good reputation.
You should find a way to get some kind of warm introduction to the investor. You can find investors on events, as mentioned above. It’s OK to approach them there, because that’s one of the reasons that they come, to scout for new startups. Another option would be to get an introduction from someone who the investor knows. Such as a founder from their portfolio company. It’s more likely that they will have time to talk to you about how working with the investor is and about your startup. However, it doesn’t mean that they will introduce everyone to their investors. They do it only when they think that it’s really worthwhile for the investor to spend time with you. Apart from the founders from the investor portfolio, the other people that could help you are your mentors or some other founders that know that investor. But the same applies as above. They will have to believe that it’s worth the investor’s time to speak with you.
The next few parts will cover building the relationship with the investors and I’ll then focus on the 9 steps that turn your startup idea into a real company.