Angela Hausman, PhD
Wanna make investors your best friends?
The secret is marketing.
Making investors your best friends
If you’ve ever been involved in a start up, you know how hard it is to get money from investors. And, unless you’re in Silicon Valley or a few other places, venture funds are even scarcer.
So, how do you make investors your best friends? What’s the secret to getting investors interested in your idea and getting them to fund? Simple, marketing.
Today I attended a session on getting VCs (venture capitalists) and Angels to fund your start up. Sure, there are some interesting twists and ins-and-outs, but, for the most part, the basics are marketing.
Why attracting funding is marketing?
There seems to be a basic misconception about marketing and people just don’t seem to understand what marketing is. So, let’s take a step back to talk about marketing.
First and foremost, marketing IS NOT sales and advertising. Sales and advertising are a piece of marketing, but there’s so much more to marketing.
According to the American Marketing Association, marketing is:
the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.
See anything about advertising and sales in there?
No.
Another important aspect of this definition is that marketing isn’t limited to just end users of your product — another vastly misunderstood aspect of marketing. Sure, customers are part of your marketing target, but you’re also marketing to clients (which is really just another name for customers, so I’ll give you that one), partners (including VCs and Angels), and society at large.
If you want to learn more about marketing, check out this post.
Marketing your product to customers or marketing your idea to investors (or even marketing your brand to alliance partners) is all the same and relies on the same basic principles of marketing, just some tactical differences and some semantics separate them.
Forbes puts it this way:
The reality, is that marketing sits at the intersection of the business and the customer – the great arbiter of the self interests of the business and the needs of the buyer. As the global economy settles into a new normal of consistent doubt, Marketing has an identity problem, a brand perception gap, maybe even a crisis of confidence.
Peter Drucker, one of the founding fathers of marketing (which is just a little over 80 years old, by the way), said business has only 2 functions: marketing and innovation.
Somehow, modern business lost its way and a 2006 survey quoted in Forbes found marketing and innovation didn’t even make the list of top priorities for executives who are much more interested in (in order): finance, sales, production, management, legal and people.
So, let’s return to the topic of making investors your best friends.
Marketing to investors
Just like marketing to customers, investors want to know what problem you solve, not how you solve it. (BTW, if you don’t already know this about marketing, then you need to go back to Marketing 101 — people buy solutions, not products).
What problem do investors have?
They have money and they want to make that money grow — by 10X, preferably.
Investors don’t really care about your brand new widget or wonderful idea (BTW, ideas are a dime a dozen — everybody has them. It’s execution that rings the cash register.
Your job, as the start-up, is to convince investors you can bring your idea to market at a reasonable cost, that someone will pay good money for your idea, and that you have the team necessary to make this happen.
Show them the money
Making investors your best friends means showing them how they’re gonna make money off of your venture. That means making a business case for profitability.
According to Inc, here are the top considerations for investors before they send in a check;
1. The team
There’s no such thing as a great idea. What you have is a great team that translates a good idea into a marketable business.
Look for a founding team with the following qualities:
- Experience – which is why it’s a myth that most successful new start-ups come from 20-somethings. Sure, 20-somethings have no fear (what have they really got to lose anyway) and don’t know somethingshouldn’t be done. Apple, Facebook, Google, and a number of successful start-ups came from founders under 25. But, how many of the ventures started by20-something’s failed.The average age of successful founders is 40, according to HBR. In their article, HBR cites data from a survey funded by the Kaufman Foundation showing founders over 55 started twice as many successful start-ups and folks in between 20 and 34. Experience matters.
- Trustworthiness
- Hard workers – no one succeeds in the start-up business without a lot of hard work (for very little money)
- Flexibility – running a start-up requires nimbleness and openness to options. I remember hearing Charles Geshke, Adobe founder, speak about his experiences. He said they nearly missed the opportunity that eventually became an extremely successful business through strict adherence to a business plan calling for Adobe to sell a bundle of hardware and software before recognizing the potential of selling just the software. Luckily, an early investor told them to trash the business plan and pivot.
- Agreeableness. Especially early investors, like Angels, want to work closely with the start-ups they fund and putting up with a disagreeable founder just doesn’t fit their needs.
2. A thorough business plan
I remember when I was still teaching full-time and the frustration over business plan assignments turned in by students that were 5-6 pages long. Heck, my outline was longer than their business plan.
Now, that doesn’t mean you need to create a business plan that 200 pages long. It does mean you need a business plan that shows you’ve carefully considered the environment, potential business models, and opportunities offered by your market.
Here are some critical aspects of your business plan:
- Who are your customers?
- Who is your competition? (Hint: everyone has competition even if their product is new to the world. Think about what other businesses solve the same problem you do? What other products satisfy the same need? And how you can get share of wallet?
- Realistic and supported forecasts of sales and expenses
- How much money you’ll need to reach your goals?
- A timeline
3. Appropriate valuation
Valuation matters to investors and founders because it represents how much of the company a founder will give away to get investment dollars from the investor. Most investors want founders to retain at least 50% of the company as an incentive to make the venture successful. So, a high valuation means you can raise more start-up capital without giving away the store.
Calculating valuation is a tricky operation. Here’s a good article showing how to calculate valuation of your start-up and here’s a start-up valuation calculator.
Research matters.
So does having an MVP (minimum viable product).
Just saying.
4. Integrity
Before making investors your best friends, you need to get them to trust you. Not only do investors want to trust that you’re using their money efficiently, but they want to know you’re treating all your stakeholders well — employees, suppliers, investors, creditors, and the public at large. The last thing they want is their name associated with an embarrassing lawsuit resulting from your lack of integrity.
5. Understand the ecosystem of start-ups
Start-ups exist in an ecosystem involving uncertainty, risk, frustration, missed family dinners and outings, late nights, sleepless days …
Investors need to know you understand that a start-up isn’t a 9 – 5 job with a secure paycheck at the end of the week. They need to know you won’t be eating dog food (and throwing in the towel) if the venture doesn’t turn a profit the first year. They need to believe you have the mental stability and fortitude to fend off uncertainty and risk — that you can think on the fly when things get ugly.
Final thoughts
Making investors your best friend will help your new venture get the capital you need to move forward. Of course, there are other options. With changes in investment regulations, it’s easier to get money from folks you know (although there’s still some paperwork involved to support their ability to fund you) or you can raise money from perfect strangers through businesses like Kickstarter. Recognize the most successful Kickstarter campaigns are those where investors are simply pre-paying for the product you’re creating.
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