- 7 Lessons This Entrepreneur Learned From Raising Seed Capital - August 29, 2018
I’ve learned a lot from raising £650K (equivalent to approximately $853,000) in seed capital from investors. As a fellow entrepreneur, I’ll share those lessons here, so you don’t waste any precious pitching opportunities.
Take the investor’s point of view
As an entrepreneur, you’re completely absorbed into your startup. This is your baby, your life. You think about it 24/7, and spend almost all of your time actively working on it.
However, investors don’t care. Investors care about investment propositions.
While simple in principle, this is the advice that most changed how I think about raising capital. It led me to completely revisit how we pitched for investment.
Your startup is not a feature, nor a product, nor a technology. Instead, you need to position your startup as an investment.
What is the underlying value of your startup? How might the investment grow over time? Who else is investing?
We used this principle to put the amount of money we were raising on the first slide of our deck. You’re asking for money, so why not be upfront about it?
The “who, why and how” of finding investors
Not all investors are equal. Each have different time horizons, sector focus and investment criteria. Many don’t actually have cash available to deploy, but they won’t necessarily tell you that!
An angel investor may have different growth expectations than a venture capital firm.
It’s important to know your investors so that your long-term incentives are aligned. Your investors will do due diligence, so by all means, do due diligence on them! It’s entirely reasonable to speak to companies they have invested in.
Unfortunately, there’s plenty of information that is not evident until you meet investors face-to-face. So, you have to play the numbers game to an extent.
This is why you need to have specific criteria about the sort of investors you want. We pitched to angel investors, trade investors, U.S.-based funds and tech VCs before we found the right set of investors. The two factors we decided as most important were:
- The ability to provide finance in potential follow-on funding rounds and;
- Domain specific expertise
Our investors meet both of these criteria. They have successful exits in software/telecom markets, as well as the financial means to participate in future funding rounds.
You should optimize for terms and suitable investors that are right for your startup, rather than worrying too much about valuation.
To help you through this process, write out a list with three columns: Who, Why and How:
- Who: Who are you going to approach? Can you name individuals, venture firms, corporate investors, friends, family, tech incubators?
- Why: Why would you want this person/organization to invest? What value do they bring? Do they have a particular role within the business or are they a silent partner?
- How: How are you going to connect with these people? Online, email, through friends or work referrals?
Doing this exercise will give you a tangible starting point to build from.
Have the correct materials
Investors need different materials at different stages. As a minimum, I recommend you have:
- A one-page investment overview
- In-depth business plan (including an executive summary, opportunity/problem, solution, technology/product, competition, business model, customer acquisition, investment opportunity, financials)
- 10 slide deck
- 30 second elevator pitch
By preparing these documents, you appear professional to investors, you shorten the time to raise money, and you further increase your understanding of your business and its place in the market, since a thorough business plan requires research and critique.
Be clear with how you’re going to spend the money. Break this down in two ways: a granular list of hires/costs, and the strategic changes this investment of funds will allow. Having specificity around how you will invest the money helps reassure investors.
Credibility is key. Add in customer references and product screenshots. If you’ve built something, show it! It doesn’t matter if an investor doesn’t totally understand your technology, but they will want to know the people who matter (i.e., customers) like it enough to part with their cash.
Be clear and concise
Much has already been written about the fabled elevator pitch. I’m sure you already have your 30-second pitch nailed… right? If you don’t, start now. The investor you pitch to has to understand what you do, and fast.
As an exercise, write out what you do on a 3×5 card. It’s more difficult than it sounds! Another way to force simplicity is to describe your business as if you were telling your grandparents.
Clarity is important, because the person you’re pitching to will invariably have to pitch your investment to his or her investment partners. If they can’t explain what you do, you’re in trouble.
You should also be clear with exactly what your pipeline looks like. A prominent angel investor once told me, “The one thing I can’t stand is when startups say they’re ‘talking to’ clients… show me something more tangible than that.”
When pitching, quantity is the path to quality. I locked myself in a room and did the same pitch 20 times in a row. Was this boring? Yes. Was I fed up with the pitch? Yes. But was the pitch polished? Yes!
Proactively seek out criticism
Nobody likes getting feedback. However, every business has its weak points. If you can face the discomfort of getting feedback on your startup’s weaknesses, you have a real advantage over other companies, as most people don’t proactively seek out criticism.
In the words of Ray Dalio, Pain + Reflection = Progress.
If you can adopt this growth mindset, your pitch and your pitching ability will improve dramatically over time. The feedback you will receive is invaluable.
We revised and iterated on our slides multiple times. Not a single slide from the original deck survived without some kind of modification. Of course, you shouldn’t act on every piece of advice. But you should collect as much feedback as possible with an open mind, and then act (or not) accordingly.
You should obviously patch up any weaknesses within your pitch, but you can also address perceived weaknesses in your startup proposition more generally.
You may have a great explanation for handling objections. As the person delivering the pitch, you should proactively steer the conversation to your advantage. A great way of doing this is by preemptively heading off objections before they arise. Put this technique into action by listing the questions you are most commonly asked, and inserting the answer into your pitch before the question can be asked.
It is worth reflecting on the conversations you have in every pitch meeting. If you continually incorporate feedback, you should see an improvement on a pitch by pitch basis. This applies to sales pitches as well as investment pitches.
Sell the bigger picture
While investors want to know their money is safe, they’re really interested in the potential upside. Especially at seed stage, your pitch needs to convey a sense of excitement and indicate potential future growth. You don’t have to be explicit with your size of market calculations, but you do need to let investors draw the conclusion that you are onto something big.
The peak-end rule shows that people place more weight on the end of your presentation, so you need to have a strong close that investors will remember.
For example, this was our closing statement:
“IBM reports that there are 270 billion inbound phone calls every year. Talkative will be the company that brings these calls into website-based voice calling.”
Our final slide emphasized this point in the form of the “contact us” options at the end of pitch deck. Instead of a telephone number, we offered our website URL for investors to call us on. The point wasn’t to get the investor to call, but rather to finish with an illustrative example of our technology, and one that is unique to our business.
Don’t lose sight of the real objective
It’s easy to get caught up in the fundraising process, but fundraising itself isn’t the real objective, it’s just means to an end.
Reid Hoffman and Peter Thiel tell an amusing story about Mark Zuckerberg’s pitch for seed capital when he started Facebook. What’s interesting is that his pitch was far from polished. But as Peter Thiel succinctly summarized, “a great business doesn’t need a good pitch.”
A pithy comment that touches on a real truth.
The aim of entrepreneurship is not to raise money, but to build a valuable business. The downside of raising capital is that it requires a lot of time and effort on your part, resources that, by necessity, leave you less time to dedicate to product development, marketing and sales.
Always remember that customers are the best source of finance!