As a founder outside of a major startup hub, it can be challenging to secure investment without the convenience of running into potential investors. However, this doesn’t mean that funding is out of reach. Instead, it requires a more strategic approach to fundraising. Learn how to enhance your startup’s appeal to investors and how to identify and approach investors, even if you have no pre-existing connections, to successfully secure the necessary capital.
Securing seed funding for a business can be challenging, even more so for founders located outside of major tech hubs. While it may be tempting to imagine which celebrity investor will back your idea, it is essential to remember that investors support viable businesses rather than just ideas. This is especially true for investors beyond Silicon Valley, who tend to be more conservative. Therefore, demonstrating the viability of your startup is key to attracting investors.
The best way to prove your business’s viability in the start-up stage is through traction. Traction is a method that shows how your business model can generate a return on investment, based on actual data, not just assumptions. To begin, create a financial plan that demonstrates how every dollar of funding will result in three dollars of revenue. This will demonstrate to investors that your model is financially viable.
Creating a prototype of your idea is also important to show investors what your product will look like. It doesn’t need to be fully functional, but a mock-up or a video can be useful. Dropbox founder, Drew Houston, created a video demo that showcased how file-sharing product Dropbox would work long before its creation, which helped to generate traction and interest.
Finally, promote your product and line up customers before launch. You can use services like Launchrock to collect details of people who may want to buy your product. Houston had tens of thousands of potential customers on his mailing list before the release of Dropbox, proving there was a market for his brilliant idea. Demonstrating traction confirms there is a market for your business concept, which is what attracts investors.
In conclusion, to attract investors, you must prove the viability of your business model. Demonstrating traction is a way to do this, through a financial plan, a prototype, and lining up customers before launch. This will prove to investors that your idea is more than just a concept and is a viable business worth investing in, regardless of where you are located.
How to Create an Engaging and Emotionally Compelling Pitch for Investors
When pitching a startup to investors, it’s easy to fall into the trap of simply stating what the business does, but this is unlikely to be enough to capture their interest. To truly make a pitch stand out, it’s important to focus on the “why” of the business. An effective pitch is relatable and emotionally engaging, and articulates the problem the startup will solve.
For example, Mike Belsito’s initial pitch for his business, eFuneral, simply stated that it was an online platform connecting families with local funeral homes. However, Belsito and his co-founder later refined their pitch to describe eFuneral as a company that brings much-needed transparency to the funeral industry. This phrasing doesn’t give much information about what the company does, but it offers a solution to a problem. By phrasing your pitch as a solution to a problem that resonates with an investor, you’re more likely to capture their attention.
Focusing on the “why” also shows investors that you’re emotionally committed to your startup’s mission. This can make you a less risky investment because you’re less likely to give up when things get tough. It can also foster team loyalty, which makes investors feel confident that you can retain the talent you need to innovate and deliver your product.
To create an emotionally engaging pitch, it’s important to understand the motivation behind your business and the gap in the market that your business fills. By doing so, you’ll help investors see the potential of your startup and be more likely to invest. By focusing on the “why,” you’ll be able to stand out in a crowded market and create a compelling narrative that investors can relate to.
The importance of avoiding assumptions in your business model
When presenting a business model to potential investors, many founders focus on impressive revenue projections and profit margins, but these assumptions can lead to a lack of trust and perceived inexperience. Investors are more interested in seeing a clear understanding of your future customers and how your resources can leverage market opportunities.
Making assumptions in your financial plan can raise red flags and turn off potential investors. For example, projecting overly rounded revenue figures such as 300% can indicate guesses rather than concrete data. Instead, you should gather relevant data to estimate market potential, as author Mike Belsito did when researching the market size for eFuneral. By obtaining data about the death rate and burial services from the US census and industry reports, he was able to provide a solid basis for revenue forecasts.
Another red flag for investors is an unrealistic marketing plan. While viral appeal can lead to exponential growth, it is not a reliable marketing strategy. Instead, you should develop an effective marketing plan based on research and evidence of customer behavior. Avoid assuming that you’ll win customers simply by spending a lot on advertising. Investors want to see that your investment in advertising will result in growth.
To create a solid financial plan, start with a one-page spreadsheet outlining how you’ll generate revenue and how you’ll spend funds to make sales. Take a “bottom-up” approach, focusing on the cost of a single sale and how you can scale revenue from that one sale to achieve many more. This approach will force you to track down the relevant data to identify the amount of money you’ll make and spend. Investors want to see that you’ve considered potential obstacles and have a plan to overcome them, rather than assuming that everything will go smoothly.
In summary, avoiding assumptions and demonstrating a clear understanding of your future customers and market opportunities is key to gaining investor trust and securing funding. By taking a data-driven approach to your financial plan and marketing strategy, you can show investors that you are a reliable and experienced entrepreneur.
Entrepreneurs in small start-up communities may feel discouraged and envious of those in larger tech hubs like Silicon Valley, Austin, or New York. However, being part of a newer start-up community has its advantages, including the ability to position oneself as a leader. Investors are drawn to leaders who can inspire a team, tackle competition, and convince customers that their product is the best. Thus, positioning oneself as a leader is essential to winning investor confidence.
How to Position Yourself as a Leader and Win Investor Confidence
Becoming a leader in a small start-up community is not difficult, but it requires time, initiative, and goodwill. One can start by getting to know other entrepreneurs in the community and identifying thought leaders and founders who host events that attract potential investors. A coffee meeting with these individuals can be a good way to network and establish a relationship. It’s crucial to have a specific purpose for the meeting, such as seeking feedback on a business plan or offering to mentor other start-ups in an area where one has expertise.
Helping others is also a powerful way to establish oneself as a leader in the community. By using one’s skills and knowledge to assist other start-ups, one can build goodwill and establish reciprocity, a currency in start-up communities. For example, if one is an SEO specialist, giving some of their new contacts a crash course in SEO will not only position them as a leader but also build goodwill.
Creating opportunities for serendipitous meetings can also be beneficial in building connections and establishing oneself as a leader. One can organize a regular meeting for start-ups at a local bar or a tech event that brings the community together. Creating a private Facebook group to exchange ideas can also be helpful. By taking the initiative to build connections, one can position themselves as a leader at the center of their community, regardless of whether they are in a major start-up hub or not.
Choose Your Founding Team Wisely
The success of a startup depends heavily on its founding team, and it is important to choose your team members wisely. While most entrepreneurs focus on their idea or product, it is the team that investors are looking for. An investor needs to see that the team can execute the vision and make the idea a reality. Building an effective team is not an easy task, especially if it started with just a few friends brainstorming in a bar. Often, founders end up with a team of co-founders who think in the same way, which can lead to homogenized thinking.
To avoid this, founders should plan their team carefully. A skills audit can help identify the knowledge base and expertise needed to get the startup off the ground. If the founder has all the necessary skills, they can convince investors that they can create a viable business alone. If not, they will need to recruit people who can fill the gaps. However, it is essential to avoid the mirror syndrome, where everyone in the team looks and thinks like the founder. Diversity ensures that the team approaches problem-solving in different ways, leading to better outcomes.
Recruiting a founding team should be taken as seriously as marriage. The founder should get to know potential recruits before inviting them to join the team. Like in a marriage, the team will spend a lot of time together, and their success will be tied to the team. It is also essential to find out the level of commitment potential recruits have, just as in a marriage, the founder should look for team members who are prepared to go the distance. Investors need to see that the team is committed to the business goals and is willing to weather the highs and lows. Ultimately, choosing a founding team wisely is crucial to the success of a startup.
Tips for Finding the Right Investors for Your Startup
When seeking start-up funding, it can be discouraging to be located outside of a major start-up hub, making it seem like making investor connections is an impossible task. However, this is not the case, and it is possible to create the investor connections necessary to get seed funding. The key message here is to create your own investor connections.
Remember, two-thirds of the initial $1 million that eFuneral raised came from investors that the founder didn’t know. Regardless of your location, it is possible to make the connections necessary to secure seed funding for your start-up.
Strategies for Securing Your First Investment as a First-Time Founder
As a first-time founder, getting your first investment can be a daunting task since most investors prefer to invest in companies that already have other investors. This is because investors feel more confident about investing when they see other people have also invested. As a result, securing your first investment check is crucial since it can help create a sense of trustworthiness for your business, making it easier for you to secure additional funding.
The point is that your most important investment isn’t the biggest, but the first. Therefore, you should do everything you can to secure that first investment. The first strategy is to become your first investor. Show investors that you are committed to your business by making an investment that’s significant in relation to your circumstances. You could also invest in other ways, such as living on a reduced salary until your business generates significant revenue.
The next step is to reach out to your family, friends, and mentors. They may be able to make small investments in your business, but it’s important to ensure that they understand the high-risk nature of investing in a start-up to manage their expectations and protect your relationship.
If an investor is interested in your start-up but hesitant to be the first to put money down, propose that they invest on the basis that you find another investor who’ll match their contribution. This way, you can get their commitment without them having to hand over a check straight away.
Receiving your first investment is a significant achievement that can give you the confidence to approach more investors and secure the seed funding you need to bring your business idea to life. Therefore, don’t be afraid to take the lead and be the first investor in your business. With the right strategies, you can secure your first investment and create a path to success.
Just because you’re not in an established start-up community doesn’t mean you can’t secure seed funding. By doing your research and presenting a viable business, you can attract investors regardless of your location and this is where PitchSee helps, offering a place for startups to present their project on a global stage., Once you secure your first investment, the rest will follow.
To keep your investors engaged and informed, post regular updates about your business. Your investors will appreciate being kept up to date with the latest developments. Remember, your investors are not only supporters of your start-up but also hold you accountable, so it’s crucial to keep them in the loop.
Inspired by a book “Startup Seed Funding for the Rest of Us”; Mike Belsito