Would you be surprised to know that some of the most innovative startup ideas fail to secure investor funding? Although many startups focus on perfecting their concept, the idea itself is one of the least weighted factors considered by investors. Startup investors listen to pitches constantly, and while they are presented with many “great ideas,” very few entrepreneurs walk away with a deal.
Americans create 543,000 businesses each month, but only a small fraction of these new businesses receive funding from investors. Studies show that venture capitalists only fund 0.05 percent of startups, while angel investors fund as little as 0.91 percent. In other words, the average new startup has less than a 1 percent chance of closing a seed funding round with an investor.
The good news is, you don’t have to be the average new startup. With a bit of know-how and the right preparation, you can significantly improve your chances of impressing an investor from the very first meeting.
You only get one chance to make a great first impression. Before you approach an investor, here are five mandatory things you must do to maximize your chances of walking away with a deal.
Build the right team
Unfortunately, just having a great concept isn’t enough. One of the greatest considerations for an investor is whether the team behind the concept has the experience to build it to success. There have been many cases in which inept teams have tanked awesome businesses. Conversely, there are also many instances where great teams have achieved phenomenal success with an average idea.
Launching and running a business takes tremendous effort. The strength and experience of your team will determine how rapidly your startup will grow, if at all. Building a team comprised of several experienced individuals with complementary skills is critical to any startup – especially if that startup is seeking to make a deal with an investor.
Don’t wait until you’re in front of investors to realize that your team is falling short of a few skills. Instead:
- Thoroughly analyze your business and identify exactly what skills and experiences are necessary to succeed
- Then, evaluate your team. Consider what skills are present, and which are lacking with your current team
Before setting up your first meeting, develop a solid team that has the exact composition of experience needed to prevail.
Validate your concept
Whether or not a business idea is “great” is subjective. What isn’t subjective, however, is hard data. You may have a great investor pitch and the personality to suit, but the numbers behind your business will always speak the loudest.
Fundable startups have traction and momentum. With real customer data, they can prove that they have built the right product for the right market. Traction doesn’t mean earning millions of dollars in revenue or generating thousands of active customers. Simply, it means that you were able to successfully progress your business given the limited resources that were available to you.
Before you meet with investors, validate that you have developed a true product-market fit by:
- Launching a minimal viable product and putting it to the test
- Finding consumers amongst your target audience and generating feedback
- Tracking customer behavior and optimizing your product/service until you have developed the ideal product that customers need to solve their problem
Validation confirms that there is a true demand for your product. It also demonstrates that you can successfully generate a return on resources. After accomplishing a substantial amount with very little, investors will be more confident that you can also provide a significant return on their investment.
Test your marketing strategy
Securing funding at any level can help you rapidly scale your marketing strategy. First, however, you must test your marketing strategy to ensure that it is both optimized and scalable. Financing an ineffective marketing strategy is one of the quickest and most common ways of burning through an investment. Investors expect that you have an ascendable plan in place for how their funding will be used to grow your business.
Before you set up your first meeting, it is critical that you identify who your market is and know how to reach them most effectively:
- Put your marketing strategy to the test by launching small-scale campaigns
- Optimize these campaigns until you have the ideal cost per acquisition and are able to easily bring in new customers while maintaining a positive profit margin
As you test your marketing strategy, you will be able to generate the statistics and metrics that you need to build a solid case. Notable metrics like a low cost per acquisition or a high conversion rate can set the foundation for easy scale once funding is secured.
Develop an awesome pitch
Now that you have collected all the stats that matter, you’ll need to create a pitch that explains exactly why they matter. Your pitch should be concise but detailed; informative but persuasive; and most of all, memorable.
The pitch you create should detail the story of your business – who the market is, what problems they face, what your solution is, and why your solution is the right solution. It should also describe why you have the right team, the right product (through product validation) and the right strategy to move it to the next level of success.
Compliment your pitch with a standout pitch deck. A strong pitch deck may be necessary to generate investor interest before the initial meeting. During your investor meeting, however, your deck will give your pitch more personality, help the audience follow along, and illustrate your startup as you deliver your presentation.
Always remember that some investors hear multiple pitches every day. In order for you to stand out, you need to be better than the other startups they have met with. This means having a stronger team, more notable achievements, better validation and a more scalable product. In order to be the best, you must beat the best; and when it comes to securing funding, it all starts with the pitch.
Know your investor
The day of your pitch may be the first time you actually meet the investor, but you should already be extremely familiar with their backgrounds. Knowing who you are pitching is almost as important as knowing what you are pitching.
Doing research on your audience before pitching them gives you a tremendous advantage. If your startup is in the same space as previous startups they have invested in, this may be a good sign that your business would be a good fit for their portfolio. You may find that they typically invest in startups in a specific industry or at a specific growth stage.
Striking a deal isn’t just about presenting an awesome business, it’s about finding the perfect startup-investor partnership. The more you know about the investor before the pitch, the better you will be able to optimize your pitch for them.
In some cases, you may be able to find videos of startups that have pitched them successfully in the past. This is especially the case for popular incubators that often showcase their “Pitch Day” videos on YouTube. Pay attention to the types of businesses they invested in and the questions they asked. Learn what is important to them and you’ll know exactly what you need to do to maximize your chance of impressing them.
The final step
Once you have successfully accomplished each of these steps, you will be able to confidently walk in and pitch any investor. With a strong team, a great product-market fit, the right strategy, and a perfect pitch, nothing should stand in your way of accomplishing your funding goal.
Likely, you won’t close a deal the first time you approach an investor. It may take multiple attempts before you find one that is passionate about what you are offering. However, if you continually improve these five steps during your fundraising journey, you can be one of the few that win against the odds!