If you have been experiencing sleepless nights over a business opportunity requiring investment, you know that the pre-revenue definition is a hard label to navigate. Getting individuals to believe in your vision, figuring out the legalities, and eventually bagging the deal is all a journey on its own.
Yet, as a founder, at some point, you will have to undergo this process for your company's best interests. Let us prepare for them by diving deep into the nitty gritty of pre-revenue startup funding.
In this guide, we will be exploring the following aspects of your investment journey.
Before setting up any meetings with pre-revenue investors, you need to know all your available choices. Remember that the pre-revenue definition is broad and includes individuals with mere ideas to startups with the Minimum Viable Products (MVPs).
A successful entrepreneur is one who can keep their customer profile and market size above their interests to determine which pre-revenue funding is best for them.
A business accelerator offers capital, connections, and mentorship to business owners. These organizations provide companies with an MVP and the necessary resources and guidance to accelerate years' worth of growth into months.
Accelerators are only for startups that have a validated MVP. That is - they have a product out in the market with few paying customers and a promising product-market fit.
Second, it's important to consider your options when applying to an accelerator program. Not all accelerator programs offer notable results or rapid change in return for their equity holdings. Apart from material changes, the mentorship itself is questionable. The tips and tricks feel basic and non-productive, especially for individuals who have been in the industry for a couple of years.
Angel investors are high-net-worth individuals who are looking towards funding startups in exchange for equity in the company. The individuals generally invest all the money in the early phases of the startup. Then, they remain a regular follow-up, with necessary aid and advice during its launch and establishment in the market.
One of the key reasons why startups prefer pre-revenue investors rather than conventional loans is the risk factor. A loan must be paid within a predetermined time frame, regardless of your company's growth and financial capacity. On the other hand, angel investors must only be paid back once the venture emerges as a success.
Secondly, angel investors are more likely to be on board with riskier initiatives than venture funds and companies. As long as you pitch the idea right, these investors will settle for unconventional means of growth and bold product choices.
This funding method also helps you go deeper into the pre-revenue business ecosystem. Angel investors avoid risk by pooling their assets in several startups at one time. Engaging with a credible individual will thus provide you with avenues for networking and building a brand reputation.
However, for all of that, you will have to share a percentage of the profit back with the investors. Carefully consider this commitment within your long-term business plans when you gear up to sign an angel investor for your startup.
Venture capitalists set up a fund that gets potential private investors to buy shares in the company. These investors are called limited partners and get returns when the startup goes public and makes its shares tradable.
With the failure rate at a whopping 90%, the early phases of a startup are the riskiest to fund. Hence, a startup may only be successful when it can compensate for the failures of the VC fund yet provide substantial profit in the meantime.
To put it straight, if your business model can not promise 5 or 10 times the return, then a VC is not for you. While a VC promises the faster route, it also demands significant equity from the company. Not only does this largely shorten the profits, but it also takes away some control of the operations.
Secondly, when signing on a VC - you should know the exact required financing volume. Different VCs invest differently and knowing your company's standing will help you pick the right one.
Look through the five stages of pre-revenue venture capital to ascertain where you stand.
Unlike angel investors or venture capitalists that provide a large sum all at once, crowdfunding allows you to get small amounts from different people. This is done in exchange for various kinds of awards by just people who find your business campaign convincing.
Having a 'crowd' to fund your business venture isn't unconventional in the startup world. However, online platforms such as KickStart, GoFundMe, and CrowdFunder have made the process incredibly accessible and commonplace. These sites expand your market by enabling you to introduce your product to a global target audience. This setup is called a crowdfunding campaign.
Crowdfunding sites allow campaigns to run, sometimes in exchange for a percentage of the raised capital. The policy differs from site to site. Yet, every campaign sets a goal amount for raising money and runs for a predetermined time frame.
Eventually, some sites may let you keep all of the funds while others may demand a percentage share. In some cases, like Kickstarter, an all-or-nothing policy causes the funds to be reversed in case the goal amount is not reached.
On the other hand, investors seek rewards in exchange for their funding. These rewards range from anything between exclusive access to the product to widespread public recognition and even equity holdings in the company.
Based on the reward for the investor, crowdfunding falls into four main categories.
As the name implies, donation-based crowdfunding is an investment with no expected returns. The individuals who fund them do it to support the venture or help it grow. Hence, it is usually successful for non-profits or charitable causes.
Equity crowdfunding allows startups and small businesses to receive investments in exchange for partial ownership of the company. Online sites, such as OurCrowd, help achieve that by allowing you to sell shares of your company to potential investors.
The invested amount typically starts in the thousands, and eventually, investors benefit from a share of the profits. That makes equity crowdfunding risky on their end, as returns are not guaranteed. Especially because startups do not have dividends or interests in place, profit only depends on the company's performance.
Reward-based crowdfunding uses different 'rewards' apart from equity holding to incentivize investors into funding. Some usual rewards include exclusive access to the product, complimentary accessories, or public recognition at best. These rewards are subject to the amount of funding.
Peer-to-peer lending is a crowdfunding model that matches entrepreneurs with potential investors. The money shared is in the form of debt. The investor receives monthly installments with added interest. In this way, the lender benefits from higher interest rates than a savings account, while the borrower has to pay lower interest than a bank loan.
Lastly, the most obvious way out is to look within your friends and family for potential funding. Share your business story with these people, let them in on your required finances and then decide whether you'd prefer a loan or an investment model.
Make sure you fulfill all formalities, including a pitch and a business plan. It should not be a done deal just because you know the other party.
If you do not find someone in your immediate circle - look in your community. People will often do whatever it takes to see the local business thrive. Hence, finding an investor with a cultural or geographical connection could be a plausible way out.
Of course, no one is waking up tomorrow with a call from Silicon Valley or even one from the city's biggest VC firms. Especially if you don't have the networks or the resources to attract the big fish, you need to go out hunting yourself.
Fortunately, in today's changing landscape, there are several accessible methods for startups to recognize themselves in the startup ecosystem.
Tons of online communities can help match your business model with the right kind of potential investor. That is especially useful as it opens you to a global investor community and increases your chances of receiving funding.
For instance, AngelList works all across the world to connect startups, investors, and fund managers. SeedInvest also works around the same pattern.
On the other hand, if you're looking for a site to make reliable donations, Kickstarter or Indiegogo are credible choices.
Every social media site today boasts thriving communities of industry people, as investors tend to be very active on them. For instance, Twitter is especially home to several startup communities. Similarly, Facebook hosts many private investing groups and grant programs. Apart from communities, direct messaging investors on their profiles or good, old emailing can also give you an easy way in.
As a business owner, you need to love the limelight and remain visible at every significant event. Networking events such as startup award shows, meet and greets, or Angel investing events are great spaces to showcase your work and build connections.
These events are also pitched meetings on their own. Before you head out, try finding the list of attendees and do your homework. This will help you approach the right people and say the right things to have a productive experience.
One of the most important components of a founder's journey is to share their vision with a group of individuals who hold the future of his company in the palm of their hand. Investor meetings are critical and sometimes even become the difference between a funded company vs. a non-funded company.
Use our foolproof tricks to help prepare for the big day and fight the jitters the night before your investor meeting.
Most entrepreneurs will go all out and instinctively reach for all potential investors. More often than not, this strategy will backfire owing to a lack of exclusivity in your elevator pitch.
Instead of chasing every available investor and putting in the effort of pitching your business idea, do some background research first.
Every private investor caters to specific niches and follows a pattern regarding investment models and equity holdings. Go through the public information on their websites, news articles, and social media. This will give you an understanding of their investment preferences, interests, and current portfolio.
This information may also reveal what kind of companies they are interested in, such as those producing a certain number of returns. You can also utilize this information to further reach out to companies they have invested capital in, in the past and learn more about them.
With sufficient homework, you will finally be able to gauge the experience and influence of the investor on the market. Then, you may determine whether it is worth going after them.
A secondary advantage of spending valuable time researching the investor is the ability to relate to them. Surfing through public information will reveal personal details, such as their hobbies and interests.
You can use these details to add nuances to your elevator pitch. For instance, if you find out that a particular investor is closely related to some charity, find a great story from your life regarding the same cause to create a personal connection.
Once you have approached a new investor, chances are they would like to look into your company before setting up a meeting with you. In that case, you should have a comprehensive business plan ready to present.
This business plan should convince the investor that your company is worth considering. Your business plan should identify your company's progress up till now, including a detailed picture of your current financials.
This should be accompanied by expected returns and key milestones you plan to achieve by raising money. While detailing your milestones, make sure to view the picture from an entrepreneurial lens rather than that of optimism. Be realistic about the returns you expect and present an in-depth growth strategy.
Lastly, make sure you highlight what sets your product apart from the competitors in the market. If someone is going to believe in your idea, they need to know that you acknowledge the threats around you and are doing something about it.
In short, your business plan should be a testament to the fact that your product expands the existing market instead of saturating it.
A pitch deck is an executive summary of your business plan that gives an idea of your company's mission, product details, and funding requirements. The pitch deck is a sales-oriented, visual document followed by a presentation and Q&A session. Below are some helpful tips on pitching investors.
An ideal pitch deck should only last approximately 30 minutes, and this is the time it takes for an investor to determine whether you're worth the attention. Hence, it is important to make your pitch engaging. Use infographics and images to create a thoroughly engaging visual experience. Keep the design minimal, use consistent fonts and make sure the overall presentation is easy to follow.
Apart from knowing what value your product brings to the market, the investors want to see how passionate you are about it. The best way to demonstrate those emotions is by being raw and upfront about the story behind how you started. Talk about your company's structure, team, and vision.
Use the following pointers to keep your pitch engaging and interesting.
Regardless of all the talk about engaging the investors, the one thing they want from you is transparency regarding your financial statements.
As you talk about turning your operations into profit, use the numbers from your books to back up the claims. This is how the investor gets a clear picture of what you're already spending, your projected costs, and your ideas for using the funding. Create a 2-to-5-year timeline for all your assets, liabilities, and net worth to show them how their investment could influence your books.
Lastly, if these calculations fail to exhibit profit for the investor, you won't get the deal. Hence, spend some time devising an effective strategy that caters to all parties. We even suggest having a plan B ready if the first fails to convince the other side.
Most investors aren't sitting through a product pitch for the first time. They've done this countless many times and know exactly where to dig deeper. After you are done with your pitch, an investor asks a series of questions to gauge whether or not you know your stuff inside out.
Therefore, one of the best practices before a meeting is to prepare a list of potential questions and practice their answers. The investors will want to catch you off guard by thoroughly examining every zero on your financials and every credential on your business plan. Anticipate some of the hardest questions one could ask you to prepare for this stage of the meeting.
The good news for you is that they do this at every meeting, so there is only so much creativity they can bring to the table. Most of these questions fall into the same categories.
For instance, they would first like to target your qualifications and gradually move toward how you structure your operations. Then, they'll dig deeper into your vision regarding why now is the right time or what makes you believe the returns would come in. Lastly, expect a lot of scrutinization of your legal and financial matters and an understanding of your competitors.
Think of an investment meeting as nothing more than a key relationship to nourish. You must walk into that room with utmost confidence and let your actions speak for your competency and credibility.
Your first impression starts from the moment you meet eyes with the investor. They need to know that you own the space and have faith in the very ideas you are pitching them.
Part of making this first impression includes your body language and personality. Make sure you are dressed well for the occasion. Try to be in the conference room a couple of minutes before their arrival so you can have time to gather your thoughts. Once the presentation starts, keep an approachable and passionate tone as you go over your venture.
Secondly, try to make the meeting feel more like a one-to-one conversation than a presentation. You should actively engage with the investors with questions and comments to be on the same page and keep their attention intact.
Despite all your research, you must still double-check your company's alignment with the investor's fund. You can determine the mutual fit by asking the representatives their approach to the model and keeping the following questions in mind. Before you meet investors, ask yourself
Before you present your pitch, it is your right as a founder to have this conversation with the investor. It also sets a professional tone to follow and gives you equal command in the room.
If the nature of your product allows, include a small demonstration as part of the presentation. No matter how good your pitch may be, seeing your business idea in action can change the course of everything.
While you do so, use it as an opportunity to discuss the room for improvement in the product. The investor will understand that it is merely a prototype, and experiencing its value will make your chances of getting the deal skyrocket.
Investors have an eye for detail and can better gauge what will or will not work in the industry. Hence, keep an open-minded approach during their comments and criticism. Playing on the defensive only makes you look arrogant. Be humble and acknowledge that their experience outclasses yours to take their advice seriously.
Once the formal proceedings are over, you should approach the representatives to discuss future meeting prospects and timelines. Question them regarding what's next in the due diligence and ask for a tentative close date for the deal.
Real heroes are not those who nail the investment meeting. They are those who know how to maintain the relationship outside of the conference room.
Once the meeting is over, the waiting period starts. However, don't let your investor ghost you out and send up a follow-up email to remain relevant and make a mark.
A quick "thank you email" is standard and takes no time to draft. Yet, it solidifies the investor's belief in your passion and presents you as a reliable leader for the firm.
However, this email should not be a copied gratitude message. It should be a personalized message aligned with the proceedings of your meeting.
Perhaps, there was some question in the meeting that you failed to answer properly. Take a couple of lines and elaborate on that. Or, maybe there was some material you promised them to get back with later? Fulfill that commitment or update them regarding how your team is restructuring things based on any critique given.
If nothing, give them a summary of the meeting with a call to action. Regardless, present yourself as a professional who knows the real deal beyond mere flattery.
If the first meeting could get the deed done, startup failure wouldn't stand at more than ¾%. You must be patient to sit through multiple meetings that may take undetermined periods to reach your goal.
Hence, make sure you keep scheduling meetings with other pre-revenue companies as you wait to hear from some. The key here is to remain encouraged throughout the process and not feel overwhelmed by the monotony of it all.
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