Welcome back to Breakthrough Marketing Secrets!
And I guess that applies as much as me, because I took a 7-day break from these daily emails to be with family.
While it’s always a little slow starting back up, I’m happy to be back in the saddle again, bringing you another breakthrough every weekday.
Today is Monday, which means it’s time for another edition of Mailbox Monday. That’s where I go digging into my inbox, looking for your questions, and answer what I find.
To have your question answered, send it to me at [email protected].
That said, it’s time to move to our question of the day!
I’m interested in starting a business, and would like to raise money to do so.
My question is: How can one raise capital for their new business?
What’s the best way to attract investors?
This is a question that’s RICH with possibility, and I’ll try to cover as many useful thoughts here as I have time for…
This will by no means be a perfect list.
I haven’t raised funds for a dozen startups, much less one. However, I have peers and associates on both sides of this industry — investors and founders who’ve raised capital.
I’ve consulted with others in raising capital and in the all-so-important pitch process (it’s selling).
Companies I’ve helped hone their pitch have raised capital successfully, with at least some minimal contribution from me.
I’ve also successfully built my business with zero outside capital — which you’ll understand the importance of in a moment.
So without any further ado, here’s my list of steps or process for attracting investors and raising capital for your business…
- Build a business that doesn’t need investors.
By and large, this is the single-most powerful thing you can do to attract investors to your business. If you don’t need money, they’ll want to give you money. Or at least, want a piece of your company (which they get through investment).
If you’re able to build a business that doesn’t need investors, it will make it easiest to ask for money. Just give specifics about how you’ll use the extra money to accelerate growth, and it’s very easy for them to say yes.
That said, I know most people won’t go this far, and want money to replace the need to bootstrap their way to success. The problem with this is that if you can’t make it successful when your money is on the line, you’re pretty unlikely to make it successful with someone else’s money. In fact, having others’ money makes failure easier both emotionally and intellectually, which probably means you’re even more likely to fail if you get an investor.
Oh yeah, and if you build it without outside investment, you own 100% and don’t have the pressure of pleasing investors, which means you get to build the business you want, not the business they tell you that you have to build because it’s their money on the line.
That said, I’m going to assume I haven’t totally dissuaded you (unfortunately) from trying to raise money, so I’ll continue.
- Make sales of your product or service.
One of my business mentors, Mark Ford, wrote a very good book titled Ready, Fire, Aim, under his pen name of Michael Masterson. I consider this required reading for anyone considering building a business. In it, he breaks business down into three stages. Roughly, zero to $1 million, $1 million to $10 million, and $10 million to $100 million. Each stage has its own challenges, obstacles, and requirements to reach success.
In the zero to $1 million stage, the first and most important challenge and obstacle you must overcome is being able to sell the product or service you wish to offer. If you fail at this, you have no business.
I’ve also encountered many investors (the more shrewd, business-savvy ones, at least) who consider this a bare minimum prior to investment. If you can’t sell at least a minimum viable product (look it up), you have no right asking for their money to back your business.
Find potential early adopters. Get them to buy. Or at the very least, sign a letter of intent to buy whatever it is you’re offering, as soon as it rolls off the assembly line. If you can’t get this commitment, go back to the drawing board and tweak your product or service until you have a few enthusiastic customers lined up for whenever you can deliver.
- Get as far as you can with F&F investments.
I once talked to an investor who told me that if I (or anyone else) hadn’t proven an idea with my money, my friends’ money, and my family’s money, then he wanted no part of it. If you really believe in an idea, sell it to your friends and family first. Save up your own money as the earliest investments. Use that to go from zero to one, long before you seek out professional investors.
They want to see traction, that you really have something more than a bold idea and unfounded confidence. The best way to get there if you don’t have resources of your own is to find others in your circles who do, and get them on board first.
The best part of this? You don’t have to buy mom a house after you become a millionaire, because her early stake in the company will make her one, too.
- Study the private equity industry.
Once you’ve gotten this far and decide you still want to try to get investors, do your homework. A TON of it. Get to know the private equity industry. Read books — how-to and personal memoirs. Watch documentaries. Talk to people if you can. Study blogs. Watch YouTube videos. Suck it all up, and try to get as complete of an understanding of the industry as you can.
Then, study it more. While a good enough business, on its own, will attract money, this will serve you in many ways. For one, you won’t look like so much of a fool when they start throwing around terms you’ve never heard of (but are common in the industry). Also, you are far more likely to understand any deal you’re offered, and to be able to make sure the terms are to you liking. (While you’re at it, find a competent accountant who knows 10X as much about the industry as you do, and who has preferably been a part of more than a handful of the kind of deals you’re looking for.)
- Study businesses that have successfully gotten funding, and how they did so.
You didn’t do enough homework yet.
You’ve studied the industry, now it’s time to study people who were once like you, a starry-eyed entrepreneur in search of a bundle of dough to back your crazy idea.
And skip past all the biggest ones. Facebook and Twitter and all those. Their stories are interesting, but you’ll be better served by a bunch of companies that didn’t do 1/100th as well. Study some that got money and succeeded, and others that got money and tanked. Try to understand the failures as much as the successes.
If possible, get as much information about what the company was BEFORE the investment, and how they presented and pitched it. Plus, all the information about what the company became after they got the money.
- Build a pitch deck to present your company.
I once spent a decent amount on a short PDF all about building a pitch deck, and how to pitch to investors in general. It was written by a couple guys far more qualified than me. Guys who actually used the information they were sharing to raise money for their startups. $100 million+. And who also invested over $20 million of their own money into other companies, like Twitter.
The book contained a lot of info about how to pitch your company to investors. It also contained its most valuable advice: how to build a pitch deck that presented only what investors most want to hear, and no more.
I could go tell you to buy the book now, but there’s one problem. You can’t buy it. Rather, they now give it away for free. So you just have to download it.
- Go to startup days and watch pitch competitions.
Even when you’re pretty confident, you’re not ready. In fact, that first dose of confidence is misplaced. You now know enough to be dangerous, but not enough to get out of the bad situations your little knowledge will place you in.
You need to go watch other dreamers like you have their heads handed to them on a platter, because they sucked at pitching, had an under-formulated idea, or just didn’t have the business they thought they had.
Go to one of the many startup days that take place around the country on a very regular basis. Go watch pitch competitions where real investments are on the line. Watch others pitch in an environment where they get real feedback from real investors who could put down the money if they liked what they saw.
The most important thing to watch here is not who succeeds, but who fails. Try to predict the winners and losers before the judges share their opinions, and see if your reasons match the judges. Once you’re getting it right far more often than wrong (in other words, once you’re thinking like an investor), you can start to have some confidence you might kinda know a tiny bit.
- Go back and watch every episode of Shark Tank.
Like the above, this gives you a sense of what’s investment-worthy and what’s not. What are the reasons an investor will like a company, and why they pass.
Try to ignore the drama and human interest stories, and really get at the heart of whether or not the pitch represents a good business or not.
The downside to this is that it’s reality TV, so everything is edited, and deals you think went through often get killed afterward in due diligence. But still, this will tell you a lot about what investors want.
- Revise your pitch deck and pitch presentation.
Now that you’ve learned a few things, go back and see how it impacts your pitch. What were you missing before that you now know you need to feature? What parts of your business should meet the chopping block before you meet with investors?
Most importantly: try to see your business as an outsider would. Would YOU invest in the business, if it weren’t your baby?
Oh yeah, speaking of your business, you should be building it all along. Assume you’re not going to get the money, and do everything you can to get it up and running while you’re also running through this process. At the very least, make sure you’re doing early market testing to confirm that there is indeed a market for your product or service. (Hint: if you don’t do this, investors will tell you to go back and do it before you are allowed to pitch them.)
- Study your target market — and narrow down your list of ideal investors to 5 or less.
Now you’re getting close to ready to start thinking about pitching your biz to potential investors. But not so fast, bub.
Any good salesperson will tell you that the better you know your target market, the easier it is to sell. Further, the more targeted you are in the prospects you choose to approach, the easier it is to sell.
Now that you’ve really studied the whole process of raising money for your business and how to present it to investors, start to think about who you’re going to ask.
Look around for all the private equity investors you can find who might be a good fit for your business, at its current stage. (There are a lot of levels of investment in private businesses, and many investors specialize in level of investment as well as industry and/or any other factor they may choose.)
Don’t go wide. Go narrow. Look for investors based on geographic proximity. Based on complimentary companies in their current investment portfolio. And so on.
Start with a list of ALL investors who might be a fit, then try to narrow down and narrow down and narrow down. This involves a TON of work. You want to end up with 5 or less (and certainly not more than 10) who are a REALLY GOOD fit for your business, and you should know exactly why.
- Do even more homework on your prospects.
Think that was good enough? Think again! Do even more homework on your short list of potential investors to really make sure you have a fit in each one, based on the best of your knowledge and research ability.
- Revise your pitch deck and pitch presentation.
Now that you have a short list, customize your pitch deck and presentation for every single investor you’re going to reach out to. You want to be ready to deliver a custom, tailored presentation to each one before you contact them.
Think of it like hiring. I’ve had to hire quite a few people in my past. We’d get dozens of applications that were obviously mass-submitted through a jobs website. They were immediately deleted. When someone actually customized their resume to the job in question, we’d seriously consider them. When they wrote a cover letter explaining exactly why they were a fit and why we should consider them, they got the interview. Almost nobody will do this little bit of work required, which is exactly why it’s so necessary for you to do it. If you want to be taken seriously, take them seriously and create a custom presentation for them.
You may also want to practice your pitch 5 or 500 times for anyone who is willing to put up with you. Bonus if they also can ask critical questions from the investors’ perspective. Another bonus if they’ve been involved in any one of these deals in the past.
- Reach out and ask for initial feedback.
There’s a lot of ways to start the conversation. Do what’s most comfortable for you. But mostly, make it easy for them to say “yes” to whatever first step you want them to take.
I like the asking for help approach. You tell them, “I’m working on a pitch deck for my company, and targeting it at investors like you. I know this is a bit unconventional, but can I buy you a cup of coffee to show it to you, and get your feedback on it. I’ve already invested ### [note: should be hundreds!] hours getting it right, but your perspective can probably make it better.” This appeals to ego, and they appreciate the humility. If they say no, you can ask if they’d be willing to look at it by email and give you a quick gut reaction.
If you can get a highly-targeted investor to look at your pitch deck and they like it, their reaction will be to want you to do a more formal presentation, potentially for their team.
If they don’t like the pitch, they’re likely to give you specific feedback on how to improve it (assuming they agreed to give feedback in the first place).
What’s really important to remember though is that these investors see dozens of pitches a day, hundreds a month (at least). So they’re always looking for ways to DIS-qualify you as a potential investment, and as soon as they find it, you’re out the door. If you’re courteous and respectful of their time and expertise, they may tell you why, and you can use that to further refine your business and pitch.
- Be prepared to gracefully accept rejection, but assertively try to understand why.
I said it before, but I’ll say it again. Be prepared for a no. Or a lot of them. Most pitches get a no. Many companies that go on to be huge got a lot of no when they delivered their initial pitches. You have to be willing to get a lot of no if you want to get to yes.
That said, you shouldn’t slink away with your tail between your legs as soon as you get a no. Gracefully accept that you don’t have a fit today, based on your pitch. Then, ask for clarification on why, the reason behind the no.
Ask, “I understand you may never decide this is right for you, but is there anything I could do that would make it more attractive to you, or to investors like you?”
You can also ask if they know anyone for whom they think the investment would be a better fit.
Whatever you do, don’t get argumentative, or tell them they’re wrong about you. Even if you think they’re totally wrong on some count, they probably have a very specific reason for not wanting to invest in your company, and you didn’t overcome that objection (if it’s an objection that could be overcome at all). The better you understand it though, the more likely it is that you’ll be able to address it in the future.
- Revise your pitch deck and pitch presentation.
Take every pitch, presentation, and rejection as a learning experience. It’s not a failure if you didn’t get the money, as long as you learned something.
Take what you learned and the objections that came up as opportunities to improve. And do it. Rework your pitch to make it appealing, based on what you know today that you didn’t know before.
(Also, you’re still working on building the business, right? Making sales and creating happy customers?)
- Ask again — either previous investors, or new highly-targeted, well-researched prospective investors.
If it’s relevant based on the past conversations, be willing to reach out to people who told you no before, if you believe you’ve adapted enough that they may tell you yes now. That means meaningfully changing the business or reaching whatever milestones they were interested in.
Don’t waste their time, or you’ll get a reputation, and stop getting meetings. But if you take their feedback seriously and implement, it will show them that you’re the kind of person worth investing in.
If it doesn’t make sense to go back to the same investors, pick, research, and customize your pitch to a new short list of potential investors who you feel are a remarkable fit for your business. Reach out to them with your pitch.
- In the mean time, try to keep building, and keep building, and keep building your business so you don’t need investors.
This process can go on for a long time. Just make sure that all along the way, you’re not just waiting for the money to get started. That’s really unappealing to investors. They want to believe that you would succeed with or without them, even if the success will be greater with them on your team.
So keep building your business, with that in mind.
Maybe, at some point, you’ll even decide it’s not worth it to go chasing other peoples’ capital, and instead invest your energy into selling customers and really building your business.
There’s a TON this doesn’t cover — and it’s one of my longest posts ever!
I’ve mostly gone through the process here of YOU getting ready to pitch your business, and pitching it.
There’s a lot more that could be covered here, and that has been covered in other contexts.
In reality, learning this kind of pitch process is a lot like learning sales in almost any other context — and the fundamentals of what works for selling your business to investors are the same as selling any other product or service.
Yet, consider this. In many cases, you’d be as well off investing the time and energy it takes to master the process above instead in just straight selling your product or service. You get to build the business you want, and keep 100% of the profits.
It’s only with some specific, capital-intensive industries where it becomes REQUIRED that you get capital. In that case, you will have to go through a process similar to what I’ve laid out. However, there’s a substantial amount that can be accomplished through bootstrapping, and I believe bootstrapped businesses have a much higher long-term success rate than those that relied on other peoples’ money to even get off the ground.
Hope this has been helpful!
Yours for bigger breakthroughs,