You are sitting across the table from the potential investor, ready to blurt out your business plan at the drop of a hat. A bead of sweat trickles down your forehead, a sign of your nervousness, but you brush it away. This is your big day. You are finally about to gain some much needed capital.
The investor sits down across from you, and slowly draws his cup of coffee to his lips. He looks you over twice, and asks, “So, mate, how’s your business doing?”
The question catches you totally off-guard. “Business?” “What business? All I have is a business plan that I am dying to pitch”
When the presentation ends a few minutes later, you walk out bewildered that he didn’t jump in excitement the way your spouse did when you pitched the idea to her.
Build traction on your startup
Not knowing one simple fact was your undoing – investors are not interested in business plans. They are interested in businesses.
A typical investor is bombarded with, not tens, not hundreds, but thousands of ideas every month. And you are not the only one pitching your idea. Some of the other entrepreneurs have a working model and some even already have traction. A working business will trump “ideas” and “proof of concept” any day.
So if you walk into a presentation empty-handed right after the investor has had a chat with someone with a working business, expect to have your idea shot down.
Build relationship with investors early
Meet entrepreneurs early and watch how they perform – maybe even at their previous startup. I always ask to meet people before they’re officially fund raising – well before actually. It helps me spot patterns. – Mark Suster on bothsidesofthetable.com
If you are expecting to work your charm on an investor the way you do it with women, we must warn you that investors are much tougher to charm. David Hornick talks about the frustratingly long time it usually takes to build a relationship with an investor. Money doesn’t flow to you in a couple of meetings. Maybe in a couple of years, if you are lucky.
When an investor talks to you for the first time, he is not interested in your idea. He is interested in you. Smart investors know that it is the entrepreneur that can make or break an idea. So you are not selling your business idea, you are selling yourself. Once you understand this, you will do much better at the meetings with investors.
Don’t wait for the money
Which team would you bet on if the LA Lakers played a Division III team? The same holds true for venture capital firms; VCs prefer to bet on experienced winners. This means that if you’re a kid right out of college, even if you have a great idea you’ll most likely be written off as “likely to fail.” This is because already established winners tend to win, while unknowns are far more likely to lose.
But even if you are an unknown just starting out, there’s still a chance that you could score VC money — but the hurdles are going to be higher – Kevin O’ Connor on Seven Secrets To Raising Capital
Building a relationship and getting money might take a year, or even more – especially if you are new to the entrepreneurship world. But you have this brilliant business idea that needs to be put on the road now! A lot can happen over two years. Someone might even beat you to the punch if you wait. So what do you do?
Bootstrap, that’s what. Use your own savings. If you have none, try consulting gigs here and there. It might be tempting to ask others to lend money, but most of the time this is a dangerous option. If you absolutely have to ask someone for money, try to ask someone who understands the risks involved in investing in a venture. Family and friends, who you might consider to be the closest and hence the safest bet, are actually the last people you should go to. They rarely understand the risks involved, and will soon start putting undue pressure on you to return their money (we will explain this in a separate blog post about why borrowing from family, friends and fools (3Fs) is not ideal as you may think). You might end up losing the business, or relationships, or both.
Whatever you do, just get the business rolling. This way, you can continue to build a relationship with investors, while at the same time building traction for your business.
And if you think you can’t make something big with your small money, just think of Mark Zuckenberg, Bill Gates, Steve Jobs, Michael Dell…the list goes on.
Don’t give away all information
Here’s the deal though. Even if you have started your business with your own money, and even if it is going great, maintain your cool in your next meeting. You can’t be jumping all over the place, shouting about how many milestones you have met. That won’t do you any good. Instead, keep the information to yourself. Funnel it drop-by-drop to the investor, like you would feed a new-born baby. Investors like to see a steady pace, rather than a burst of good news. If the investor think you are managing to meet milestones regularly, you have a much better chance of getting money.
Remain focused on building your business
No matter how hot you are as a company, raising money takes time. And that distraction can often cause founders to lose focus to the detriment of other employees and the company” – Michael Lazerow on How to Raise Venture Capital (without losing your soul).
Whatever you do, don’t lose focus. Remember why you are in the game in the first place. You are in it because you are an entrepreneur, not a cash-hungry businessman. Yes, you need cash, but it shouldn’t be the sole aim of conducting business. If it is, trying to raise capital will shift your focus away from the business. This affects your business, in turn affecting what little chance you have of raising capital.
Also remember this quote from Vivek Wadhwa on Ditch the Biz Plan, Buy a Lottery Ticket:
Of course, you can start by trying raising venture or angel capital when you have just an idea (you never know, you might get lucky); but don’t waste too much time on it. And don’t get discouraged if they turn you down; you are in the majority. Instead, focus on validating your idea, building it, and selling for survival.
If you are sitting on your business plan just because you don’t have the money, or because you are waiting for the investor to give you the nod, you are already losing focus. Successful businesses are not made by waiting, they are made by acting.