Are you looking for investors or a bank loan to take your business to the next level? Here’s the truth: If you want to bring other people’s money into your business, you have to: 1) sell the right vision; and 2) back it up with receipts.
This is especially true if you are a woman or person of color who doesn’t come from wealth. Easy checks based on a back-of-the-napkin plan are not likely to come your way.
I’m a startup attorney turned tech founder turned accelerator director at Lunar Startups. I’m now a Founding Managing Partner at Tundra Ventures investing in preseed startups, and I have seen the insides and outsides of hundreds of companies. I’ve seen it time and time again: Founders who get funded are able to nail both pitching and substance.
Sell The Right Vision To The Right People
Getting other people to put money into your business – especially if they aren’t friends or family – is all about the vision you are selling. You have to be mindful of your audience and what they are looking for in a deal.
The two primary sources of outside funds for early-stage companies are investors and bankers.
Are you selling a vision of growing fast and selling big? This vision will likely be most exciting for investors, not bankers – especially if you won’t have revenue for a while.
Alternatively, are you selling a more traditional, “safer” vision of generating steady profits and using your cash flow to pay back loans over time? This vision will be more attractive to bankers. Most investors will likely be far less interested, especially if you aren’t planning to sell the company.
Let’s Break This Down
Broadly speaking, investors looking at early-stage companies are trying to find startups with the potential to become a multi-billion dollar company. Angel investors and venture capital investors expect many of the companies in their portfolio of investments to fail or 1x, so they need one or two companies to be massively successful in order to pay back all of their original investments and then some. Ideally, investors are targeting 10x or more on their investments.
With this in mind, a founder who wants to succeed in attracting investment dollars needs to show (among other things): 1) a path to exponential scale, 2) a product with the potential to scale without an enormous corresponding increase in costs (this is why so many investments go to technology companies), and 3) options for the eventual “exit” of the company. An exit usually means the founder sells the startup to another larger company or the startup “IPOs,” meaning it goes public on the stock market.
If you aren’t selling this kind of vision, most investors won’t be interested. To be clear, this isn’t a reflection on you or your business. Startup investors are playing the “go big or go home” game. If that’s not your strategy, that’s okay! Don’t sell a vision that you don’t actually want to execute.
Play The Game That Works For You
If you are playing a slower and steadier game, that’s great. Your vision of profit-generating sales and consistent growth over time (versus a long investment period and a big potential payoff at the end) is much more likely to appeal to bankers. This is especially true if you already have a product in the market and are making sales.
Pro tip: Don’t go to just any banker at a big, faceless bank. Go to a banker who works with entrepreneurs. A good banker will understand how businesses like yours work. A great banker will go a step further; they will help you understand what the bank is looking for in successful loan applicants. Then, if you are missing documentation or aren’t quite yet bankable, they will explain how to eventually become a successful applicant.
Broadly speaking, when approaching a banker you’ll need a credible plan showing how loan capital from the bank will allow you to purchase items (for example: ingredients, supplies, parts, or inventory) or pay employees to help you sell products or services and create a profit. This profit will need to be enough to keep the company going *and* pay back the loan plus interest over time.
If you are lucky and/or savvy enough to run a company that makes a steady profit and also has the potential for enormous growth and scale, you could be in that sweet spot where you could take your pick of loan capital or investor capital. In that case, you still want to be mindful of your vision and what you emphasize when talking to each audience.
Refine Your Vision, And Practice
Now that you’ve picked a vision and a target audience, go back and look at your pitch deck with a critical eye. Or, record yourself talking about your business and then listen to the recording. Get an uninterested third party to do the same, if you can.
Put yourself in the shoes of an investor or a banker and ask yourself whether your pitch clearly shows how putting money into your business has a good chance of creating more value in the business and more money back to the banker or investor. If it doesn’t, start making some changes to align your vision with your intended audience.
Vision Will Get You In The Door, But Then It’s Time To Produce Receipts
Okay, let’s say that you’ve sold the right vision to the right person. That should get you in the door. The next step is where the devil gets into the details.
To raise money, it’s critical to be polished on the inside, not just the outside. The people who make decisions about investments or loans generally have a responsibility to ensure you can back your vision up with receipts. They need to make sure that you have a properly set up, functioning business that is unlikely to suddenly close down and disappear. They will want proof of any claims you are making about your progress, partners, and profits.
A non-exhaustive list of what you’ll want to have ready to go:
- Basic legal documents. Papers showing how you set up your legal entity, your bylaws/operating agreement, and a list of the people who are owners/investors in your business.
- Contracts or letters of intent with key humans and/or strategic customers or partners.
- Financial projections and/or profit and loss statements that track with your vision. Make sure you are able to explain key assumptions.
- Basic information about your product and how you plan to grow sales and revenue.
- Protection of intellectual property (IP): Show you have protected your inventions with patents or your brand name with a trademark. Also show you have agreements in place with contractors and/or employees that protects your company’s valuable IP.
Get Organized, Stand Out
A little extra polish can go a long way. Taking the extra time to present your company information and documents in an organized fashion makes more of a difference than it should. Human brains are looking for ease, and good organization is an easy proxy for competence. Emotionally, it’s the difference between opening a messy, dusty closet versus the sparkling clean closet you just organized.
Don’t send a prospective investor or banker a file folder with a bunch of random documents inside with weird, incomprehensible file names. Take the extra half hour to present a folder with labeled, numbered subfolders that contain documents with file names that make sense.
Take a look at the folder of documents you plan to share, and imagine you are a stranger who has never seen it before. Go back in, fix file names, and group documents into categorized subfolders (legal, financial, HR, intellectual property, etc.). This makes whoever is looking at the folder’s job so much easier and increases their confidence in your ability to run a successful business.
Humans are emotional creatures - even bankers and investors! Making a good impression with your business documents is smart and can make the process of bringing funds into your company much smoother.
To sum up, if you want to bring other people’s money into your business, you have to sell the right vision (big & fast vs. moderate & steady) and then back it up with organized receipts (legal, financial, IP). Showing you understand business fundamentals and have your ducks in a row goes a long way toward convincing a potential funder to allocate funds to your business.
Your action items:
- Review and refine your pitch
- Gather and/or create documentation
- Organize your documents before sharing
- Share, and get feedback as you go!