The moment has finally arrived. You stand at the end of a long conference table, surrounded by the men and women who have agreed to consider your pitch for funding. You hope your pitch deck is right. You hope you are ready. As these potential private investors look at you with a mix of curiosity and skepticism, you know that only one thing matters: it’s time to begin.
You’ve worked hard to build out your business concept. You’ve networked and made valuable connections, but you’ve crunched the numbers, and you know you need outside funding to scale your idea. You’re ready to pitch your business to investors. And then, after all that, they write you a check. That’s the dream.
But, stepping back a bit, how do you even find the right potential private investors, much less get them interested in listening to your pitch? Above all, what can you do to convince them they should fund your new business?
I asked Roger Wong, instructor and adviser at Eugene, Oregon’s Lane Community College Small Business Development Center (SBDC), for his best advice. The former head of operations for a 175-restaurant New England pizza chain, Wong has experience with small and large companies, and today, he helps guide entrepreneurs and startups from concept to launch.
I also spoke with two representatives of a group of investors who have backed a variety of new businesses. To protect their privacy, they asked me not to use their names. I’ll be calling them “Morgan” and “Sam.”
Some of their advice might surprise you.
It’s about the people
For starters, while a business plan is important, a successful presentation is about far more. “At the earliest stages, you are investing in the people who are going to make it happen,” explains Morgan. “The business plan has to make sense, but you have to believe that the people involved have what it takes.”
Investors want to see evidence of perseverance and ability to problem-solve
Potential investors want to see how you and your team are approaching the problem you’re trying to solve—and that you will persevere. “An entrepreneur will face a thousand circumstances where there is an obstacle that is (either) insurmountable—or you can save face,” says Morgan. “There are so many chances to give up. The people who find ways to surmount insurmountable obstacles, they are the ones who will succeed.”
Early success starts with knowing the difference between who might fund your new business—and who won’t.
Fat funding myths: Keep your eyes open
Since the turn of the century, the business and tech media have been flooded with stories about big IPOs and fat funding rounds from venture capital firms. It can look magical from the outside.
But venture capitalists, IPOs, and banks are not going to even consider funding your business idea until you have some evidence—a successfully launched minimum viable product (MVP), and data that underscores that your target market wants your product and will pay for it. Many founders bootstrap their startups in the very beginning—they use their own money to test their MVP.
If you are at a point where you’re ready to pitch to investors, take off your rose-colored glasses. Investors aren’t generally motivated by altruism—their financial commitment will very likely come with expectations of having influence over how your startup is run.
Remember, they want you to be profitable so that they make money. They are going to want to hear about your exit strategy because they stand to benefit most when you sell your business. So, if you want to be the founder and CEO of your company for the next twenty years, think twice about seeking private investment. But if seeking private funding seems like the best next step for your company, spend some time researching potential investors.
How to find the right potential investors
Finding potential private investors takes a mix of online resources and old-fashioned networking. Whether online or face-to-face, Sam says a reputable investor will be looking for five qualities in you and your business:
- Integrity: Do we trust the founders to do what they say they will do?
- Market: Is there a market for the product and service, does the entrepreneur understand the market, and are they actively engaging with it?
- Flexibility: Is the team coachable? Will they listen to advice and make beneficial changes?
- Purpose: What is the plan and the measurable outcome that this funding will get them to?
- Future fundability: Is there downstream funding? What is the probability of the team executing to get there?
Online sources connecting investors and entrepreneurs
Online sources and communities for crowdfunding, investor matchups, and more include:
- Angel Investment Network USA
- JumpStart (formerly IdeaCrossing)
Naturally, this list is hardly exhaustive, but it’s a good start.
State, local, and personal resources
While online communities and social networks can connect entrepreneurs and investors, don’t ignore your own personal network either. Friends, family, and colleagues can be a bridge to a potential backer. “In a friend-of-a-friend scenario, the reference is a plus,” says Wong.
State-based organizations (such as Hatch Oregon) work like a cross between crowdfunding and traditional investing, available only for ventures and citizens in that state. Since 2015, other states have introduced similar programs. Local-level organizations such as neighborhood development loan funds can be crucial, says Wong. “Organizations like these have different levels of funding and seed money,” he says. “There’s a thorough application, but not as much as going to a bank.”
Wong suggests discussing your needs on your website, on social media, and with those in your personal and professional social circles. Small Business Development Centers will help spread the word, and your local Chamber of Commerce can be an invaluable resource for building connections.
However you connect with a potential investor, due diligence is essential. “It doesn’t matter who it is, you have to have a confidentiality agreement,” says Wong. “See what they have invested in the past. Know that they will check your background and verify what you say. Check out their background too: What happened with businesses they’ve invested in? Talk to those operations. Someone who is honest and interested will be okay with you talking with people. It’s a mutual respect, and a channel that needs to go both ways.”
Here are some other essentials to keep in mind for your business plan, pitches, and any other interactions with potential investors.
Demonstrate a passion for the process of solving the problem, not for any one solution
“Don’t pitch,” says Sam. “Ask questions.”
Investors want to gauge an entrepreneur’s curiosity, and their willingness to learn and adapt. It’s part of a balance the entrepreneur has to strike. “There’s a belief, a deep belief, that this is going to work,” says Morgan. “They also have to know that what they are doing might not work, or they might have to change it to meet the market where it’s at. I like to see a passion for the process of solving the problem, not for the solution itself.”
Know your resource gaps—and how you’ll close them
Investors understand that an entrepreneur approaches them to fill a need in order to grow the business. The “resource gaps” aren’t what matter most, says Morgan. “Can the person marshal the resources to get it done?”
The entrepreneur must demonstrate (and the business plan explain) that they understand what resources they have access to, where the resource gaps are, and, how they can access and implement additional resources.
“Have dollar amounts connected to specific activities, deliverables, processes,” says Morgan. “If I write you a check, I want to know what that money is going toward. We give money so we can see specific things happen. When you tell us, ‘Here’s what it’s going to take to do this, and here are the costs associated with the outputs,’ that’s compelling.”
Be confident and transparent
“All investors look for, number one, is self-confidence,” says Wong. “An investor wants to know that you know what you’re talking about.”
Here are questions that an entrepreneur should be able to answer—with confidence:
- Is there a need for what you want to do?
- Is it satisfying a market desire?
- Does it resonate with the consumers?
- Does the market understand you and what you want to do?
The essential companion to confidence, says Morgan, is transparency. Investors need to feel confident too—confident that the entrepreneur is trustworthy and honest.
“I work with startups all the time. What I hate to see in the pitch is they’ve got everything all solved,” explains Morgan. “That’s not true. If it were, they would already have a business, with customers, and with money rolling in the door. There are things they haven’t figured out, resources they don’t have. You want to see the clarity of them understanding what they don’t have and being honest about it. Some things are unknowns because they just don’t know it yet. Be honest about that.”
Validate your business with your target market
A great idea and a dedicated team are essential—but so is understanding your business’s target market. “It’s not about what the entrepreneur wants,” says Wong. “It’s what the market needs.”
Investors will want to see if the entrepreneur has talked with people in their market to validate or challenge their ideas. “If you meet an entrepreneur who has one hundred percent validation that an idea will work, but they haven’t talked to the customers, that’s a bad sign,” says Morgan.
Develop a solid pitch deck and business plan backed by good financials
An entrepreneur needs some sort of business plan and a thorough pitch deck, the presentation that they’ll refer to when meeting with potential private investors. Solid financials must support both.
“It may be your dream and your baby, but if the facts don’t justify it, it’s not going to work,” Wong explains. “What are the sales projections? How is cash coming in?”
The key is demonstrating a clear idea on how and why the business can make money. That doesn’t necessarily require a full business plan, says Sam. Lean Planning could be sufficient.
Investors want to see the business’s path to profit. “The writing has to be backed up by the financials. The facts can be verified,” says Wong. “You cannot say one thing in your numbers, but then say something else in other parts of the plan. The plan and numbers have to be in sync.”
Know your plan and pitch
Entrepreneurs don’t have to know everything, but they have to be prepared with a solid presentation, plan, and pitch. Probing weak points, investors will have questions—sometimes unexpected ones.
“Preparation is mostly coming up with a compelling presentation that exposes to the investor a potential big opportunity that sounds feasible based on some market insight and/or somewhere the market is going,” says Morgan. “You hear ideas all the time. What we like to hear is ‘this idea is going to work because people need this and here’s why.’”
Give yourself the best chance for yes
Investors want to know that they are taking a reasonable risk on you and your venture. They’ll hear you out—as long as you earn the privilege by showing that you are well prepared.
“They are looking for confidence, plus knowledge in the business,” says Wong. “They want to see that the entrepreneur can look into the business and drive it. They are interested in the team that has been built. They want to see a balance, a collection of ideas and expertise that can make the business successful. The entrepreneur can bring it together and move it all forward.”
Do everything you can to be prepared. Investors can seem reluctant to listen to your pitch because they want to be sure that you have thought everything through first, and that your business falls within the parameters of the types of companies they’re most likely to fund.
“The vetting process is hard. People don’t want to take meetings because most meetings fall into the unprepared and delusional category,” says Morgan. “About twenty percent fall into the category of prepared and passionate. That doesn’t mean we’re going to fund you, but we’ll at least hear you out.”
If all goes well
Best case scenario, you arrive prepared. You’ve done the research—there’s a good chance this company would fund a business like yours. You present a clear and well thought out vision with financial projections that make sense.
When the meeting ends, you smile. You answer some hard questions, but there weren’t any big surprises. You set a time for a follow-up meeting or discussion after the group has had time to think about your presentation and review your business plan.
You say your goodbyes. You’ve done all you can—and now you wait.