If your goal is to secure outside investment in your company, you need to structure your business (and business strategy) accordingly. Here are 10 tips for entrepreneurs who hope to acquire financial backing from angel investors and venture capitalists.
For most startup companies, funding is the one major hurdle standing in the way of market success. You have the product. You have the plan. You have the team. But, what you don’t have is the capital to invest in bringing your vision to life.
While there are other options available under some circumstances (for example, if you come from a wealthy family or have the network to launch a successful crowdfunding campaign), in most cases, securing outside investment in a startup company means approaching angel investors and venture capitalists. These individual and institutional investors offer capital infusions ranging from the tens of thousands to tens of millions of dollars. Of course, they aren’t just handing out checks. They expect to make a return on their investment – a healthy return – and if they are going to invest in your company, they need to feel confident that it is a smart addition to their portfolio.
With this in mind, here are 10 things startup founders absolutely must know about seeking outside investment from angel investors and VCs:
1. You Need to Plan Ahead.
First of all, you need to plan ahead. When you form your company, you need to form it with an eye toward outside investment. There are certain things that angel investors and venture capital firms look for in portfolio companies; if your company isn’t structured properly, they might not view it as a viable investment opportunity. When starting a company with the goal of securing outside investment, some of the key considerations include:
- Should you form a corporation or limited liability company (LLC)?
- How should you structure your company’s classes of shares?
- What protections should the founders have (and what protections will turn off angel investors and VCs)?
For more, read our Startup Guide: How to Structure Your Company for Outside Investment.
2. Not All Angel Investors and Venture Capital Firms Are Created Equal.
While angel investors and VCs tend to get lumped together, the reality is that not all angels and VC firms are alike. When seeking outside investment, you need to target investors and firms that both (i) invest at your desired level of capital infusion, and (ii) invest in companies like yours. Some angel investors and venture capital firms focus on tech startups, while others may only fund socially conscious enterprises or other specific niches. Some invest thousands, while others invest millions. So, when you are doing your research, don’t just look for a potential investor, look for the potential investor that is the best fit for your company.
3. Raising Capital is a Courtship.
Regardless of the level of investment, an angel or VC is not going to put its faith in you until it feels confident in doing so. Investors want to know not only that you are passionate about your innovation, but that you have the skill, discipline, and drive to see your business plan through once you have secured their funding. Angel investors and venture capitalists will generally expect to have some level of involvement in the business as well, and they will want to know that you are as good of a “partner” as you are an innovator.
4. You Are in a Competition.
Even once you narrow down your list of potential investors, your company will still be just one of several potential suitors on these angels’ and VC firms’ radars. You need to follow the process (more on this below), but you need to do so in a way that makes your company stand out from the crowd. If you make inroads with a potential investor, this is not the time to get complacent. It is the time to step up your game and do everything you can to win a spot in the next round of funding.
5. There is a Process You Need to Follow.
All angel investors and venture capital firms follow procedures for evaluating potential investments, and they expect you to follow them, too. From the initial inquiry to the partner meetings where investment decisions are made, understanding what is expected of you is crucial to presenting a strong case for funding. While you may be a novice in the venture funding process, you don’t have to act like one. Invest the time and effort to show that you are serious about using funding to grow your company.
6. You Want to Be Concise.
Angel investors and venture capitalists are busy, and they hear pitches every day. They know what they want to hear, and it isn’t a rambling monologue that never quite gets to the point of why your company is worthy of their consideration. Know what you want to say, and then figure out how to say it as concisely (and professionally) as possible. As long as you hit the right points, pitching angels and VCs is one situation where less really can be more.
7. You Need to Be Honest.
If you overstate your product’s capabilities or misrepresent your company’s numbers, this can come back to haunt you in a big way. Not only will it turn off potential investors for your current venture; but, angels and VCs talk, and it could scuttle any hopes of outside investment in future ventures as well. Any falsities will almost certainly be uncovered during the due diligence process, and the last thing you want is to start the funding process only to have it end abruptly because a misstatement you made came to light.
8. Investors Want More Money to Follow.
This goes back to what we said in the beginning about planning ahead. In most cases, when angels and venture capital firms invest, they want to see that you have a plan (and the legal structure) in place to secure additional funding as the business grows. This requires a careful balance: You need to offer attractive investment opportunities to early-stage investors, but you cannot let your first round of funding prevent you from executing future rounds.
9. Investors Care About the Legal Stuff.
If you started out on a shoestring budget, you probably let some of the legal “stuff” fall by the wayside. Now is the time to get caught up. If you haven’t registered your company’s principal trademarks, register them now. If your innovation is eligible for patent protection, start the application process today.
10. You Have to Start Somewhere.
When seeking outside investment, you have to start somewhere. If you think you’re ready, refine your pitch and attend “Meet the Angels” events in your area. If your company needs time to grow, consider looking into an accelerator or incubator program – there are more popping up around the country every day. Get the process started, develop a plan, and be persistent until you reach your funding goals.
Jiah Kim & Associates | Business Lawyers for Startup Enterprises
If you would like more information about structuring your company for outside investment, or if you are considering offers from angel investors or venture capitalists, Jiah Kim & Associates can help. To speak with an attorney, call (646) 389-5065 or contact us online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.