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How to approach investors…the right way

Asking for investment is always a nerve racking process. Most of us, unfortunately, don’t have a trust fund or relative to go to from whom we ask for an investment (although this process can still be extremely nerve racking despite the mutual connaissance). 

Once you have decided that your business definitely needs some form of investment, it’s essential to define the type of investors that are right for your business and situation as to know where to start looking. Types of investors include personal investors (usually a close acquaintance – again this option rarely applies to most), angel investors (someone who helps a very new small business), venture capitalists (someone who offers funding based on your business’ long-term potential) or peer-to-peer lenders (loans direct from an individual, without any middlemen). 

When approaching investors, you must remember that their primary responsibility is to maximise return and minimise risk. Put yourself in their shows and, well, it makes sense. From your end, well, a targeted approach to fundraising means you’ll be raising from the right kind of investors – those whose values align with yours and who will offer you terms that work for your long-term goals. 

Essential information to include within your business model is, of course, key financial figures, talent, expected terms and spending plans. Specialist expertise, in the shape of lawyers and accountants, is going to be needed (and you’ll want to bake the cost of them into the amount of capital that you’re seeking). 

A word of warning; do not rush investment plans no matter how desperate you feel your business needs them. You should approach investors only once you have complete confidence in your business. A poorly planned, premature ask can permanently harm relationships.
A general rule of thumb is that you’ll need to start approaching people at least six to nine months before you expect to see any cash. However, if you begin having conversations with investors before everything is polished, you can often work with interested parties towards readiness. 

How long the preparation period takes will depend greatly on your business’ unique combination of strengths and weaknesses. You need enough time to position your strengths in the best way possible and to tackle your weaknesses. For example, you might have a strong team and a strong product, but be lacking some of the key financial figures. Remember, investors invest in people (eg, the founding team) – you may not always have the right answers, but understanding your business and industry is key.  

Furthemore, depending on the type of investor you’re approaching, your pitch will need to be tailored to both their needs and the nature of your mutual relationship. For example, what you need to provide when you’re looking to raise money from friends and family or an angel investor is quite different from what a venture capitalist will want to see. 

Here are some general tips in best preparing for investment pitching; 

Strengthen the narrative
Think about the problem you’re solving and what gives your product an advantage, if you’re looking for growth capital. You need to be able to articulate this in a succinct and captivating way. Your business plan should provide the blueprint. 

Showcase the potential of your market
Accumulate some data to validate your story. That might range from the size of your market to bringing in user research. If you haven’t launched yet, show that you’re aware of any barriers to entry and detail how you plan to overcome them. Customer avatar creation may also prove useful here. If you can, outline why you’re better than your competitors. If you see your position in your market as a particular strength, try to garner things to back this up, like awards, partnerships or press coverage. 

Legal needs to be tight
Look into the specific legal requirements at each investment round in the country you’re operating in. On a basic level, you need to be allowed to offer equity, be registered as a company and have a co-founder or shareholders’ agreement. There are additional things too, such as intellectual property ownership, insurance details and contracts with employees, suppliers and customers. 

Build trust in your team
Ensure your leadership team is up to the job. Detail the skills and experience of the key decision-makers, making sure that they’ll stick around after the investment is completed. If you’re lacking certain skills, bring people on board with those abilities, or outline how the investment would help you do so. You should also formalise your business’ governance structure. Mock up an organisational chart and outline how decisions are made and how new shareholders will influence this hierarchy. 

Entail precisely what the money will do and where it will fit in
You need to ask for an amount of money that reflects where your business is and what it’ll take to grow in the way you seek. Show your working: that might include a financial plan, with sales and spending projections for the year ahead and the impact the capital will have. You’ll need to outline what your plan for the investment capital would be – for example, with X amount of capital, you’ll be able to achieve X return on investment. 

Be empathetic and know what’s at stake on the investor’s end
Get a sense of how much of your business you need to offer in return for an investor’s money by landing on a valuation. Similar businesses in your space can offer a comparison point, and here’s some information on valuation methods. Although valuations will vary, you’ll be expected to explain how you reached yours.

Clarify what you’d like to achieve with the help of an investor.
Think about terms, protections and options for your shareholders. All potential investors will want to know who already has shares in the business – this will be shown through something called a cap table. With legal support, consider what will happen in the event of additional funding rounds and when you project that shareholders will make a return on their investments.

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