If you’re actively looking for potential investors for what you believe is the next great business idea, remember that, for every successful entrepreneur, there are about a hundred or more that have failed to get funding for their businesses. Thus, to increase your chances of attracting angel investors and venture capitalists, you should know what it is investors look for in prospective investment opportunities.
Some angel investors and venture capitalists have only been too willing to share their expectations from entrepreneurs who approached them with proposals or deals from specific deal sourcing channels. Among their tips are the following:
1. Use their network to earn an introduction with them.
2. Build a relationship with them.
3. Avoid cold-calling or presenting a deal through other indirect means such as email.
Mark Suster, in Getting Access to the Old Boys’ Club (How to Approach a VC), says that:
“most VC’s will figure that if you are truly an entrepreneur you’ll find somebody that knows them, develop a relationship with that person and find a way to get them to introduce you to the VC. If you can’t do that then you’re probably not really an entrepreneur.”
Jason Mendelson, in Where Do Venture Capitalists Find their Companies, says that the most common sources for deals for venture capitalists include personal networks, repeat entrepreneus, and other VCs, with deals emanating from emails or over the transom submissions from entrepreneurs being uncommon, with many VCs preferring to communicate directly with entrepreneurs.
In Anatomy of a Series A Deal: Part 1 – Sourcing, David Aronoff says:
“So, how do VCs find deals? In my experience, the predominant method is via personal recommendations directly to the VCs; the entrepreneur or someone close to them has worked the firm or VC before, or knows the VCs, professionally or socially (Another VC partner, lawyer, accountant, fellow board member, etc). Led by the MIT 50K, the business plan competition, has brought an American-Idolesque tenor to direct approaches and many VC firms participate in various annual contests. (we do!). The final categories of deals include over-the-transom submissions (email, snail mail) and broker-introductions. We have made investments that came “blindly” via email or post, from folks we didn’t know before – but to be honest, the numbers are very small.”
Alex Taussig, in What a VC Does, says that:
“Inbound consists of friends, executives at big companies, portfolio company managers or customers, service providers, other VCs, and (occasionally) investment bankers. Because inbound deals tend to have a higher hit rate, VCs like to maximize their productivity by preferentially focusing on them. This is why a “warm introduction” is often so much better for entrepreneurs when raising money.”
Paul Graham concurs with all the previously cited VCs. In How to Fund a Startup, Graham says that:
“The best way to find angel investors is through personal introductions. You could try to cold-call angel groups near you, but angels, like VCs, will pay more attention to deals recommended by someone they respect.”
Thus, seek out contacts who can introduce you to someone within the VC’s circle, if not the VC directly. When you earn that introduction, you now have the opportunity to show investors if you have what it takes to suceed, if you have the “Entrepreneur DNA” that special something entrepreneurs have in common with each other that separates them from ordinary mortals. Remember, investors focus more on the execution and the team before the idea. Entrepreneur DNA will be tackled in a future post on this blog.
However, earning an introduction is not a sure ticket to the big leagues. Rather, it is the first step in the process to securing a deal. To cement that elusive deal, you should learn how to cultivate a relationship with the investor.
Lastly, and related to the first injunction above, to use the VC’s own network to secure an introduction, avoid cold-calling as much as possible. In the same article from Mark Suster cited earlier, he poses the question:
“Can you really send your business plan over the transom and expect to get a positive response? The short answer is “no” – don’t waste your time. I know some VCs would take issue with this and somehow I’m sure that there are some success stories with this method but trust me this is the worst way to approach a VC.”
In the same vein, Seth Godin, in The Problem with the Transom, says:
“What sort of proposal should you write to be sure that someone who gets it over the transom will read it? You shouldn’t. Instead, spend the time earning the right to make the proposal. Spend the time building a presence that gets you an invitation, or, at the very least, earns you the credibility to walk in the front door.”
Brad Feld agrees. In Show, Don’t Tell – Especially in Video Pitches, he says that:
“Every day I get emails from folks either raising money or telling me about their new idea and asking for feedback. The conventional wisdom is that VCs rarely invest in things that reach them randomly.”
However, the reality, as Feld dicloses later on in the same article, is that:
“this isn’t the case for us as 10% of the companies we’ve funded in the past two years were initially from “cold call” email inquiries…So – I’m very happy to get a steady stream of random emails – keep them coming!”
What this means is that a few investors may look at email favorably (which is rarely the case), but to increase your chances of getting that deal with an investor, I believe that there’s no substitute to networking and securing an introduction with an investor face-to-face.
Using the tips above from experienced angel investors and VCs may increase your chances of getting that signed deal. So, keep the following in mind – seek an introduction through the VC’s own network by building a close relationships with the “inner circle”; once introduced, build a relationship with the VC; and avoid cold-calling, whether via email or some other indirect means, unless you know that the VC is receptive to cold calls.
No matter what, you, as an entrepreneur, should persevere and lay down the groundwork needed for an investor to be convinced about your worth. There are no shortcuts to success – you owe it to yourself to prove you’re worthy of an investor’s time and money. Otherwise, your dreams will be nothing more than what they are now – pipe dreams.
Jerome Gentolia is Co-Founder at ComeUnite and Tech-Launch Solutions.