| EIR, Elevate Northeast Indiana
March 11, 2021
As you advance your startup, relationship building is critical, especially with investors. Depending on several factors, an investor could be there from the very beginning stages of your company all the way through an “exit”. While the relationship with your investors may change over time, their support and advice could help guide you through some of the biggest decisions you’ll have to make for your company.
So, how do you go about growing those initial relationships? How do you ensure that you don’t give an investor reasons to dismiss your opportunity? Your company? Your pitch? Below are 10 considerations that will help you build investor relationships, and also prepare you for questions and discussion points investors may ask of you.
- First Impressions: Realize that the first five minutes are extremely important. Each investor is different, but most want to figure out the investment opportunity quickly. If you are pitching an investor, make sure it is easy to understand your business, its value proposition, market traction to-date, and the investment opportunity. Professionalism and business acumen are very important.
- Relationship Building: Build relationships with investors through regular communications by providing written updates each month on the status and growth of your business. This will build trust with the investor and show the progress of the company. Most importantly it shows how seriously you take milestones and goals. It is best to have a consistent format for your update and can be written and delivered via email.
- Coachability: Be responsive to questions and suggestions by investors. Investors know what information they need to make a decision, so make sure you provide it to them in a reasonable amount of time. If an investor suggests you talk to someone, make sure you do it and communicate back how the meeting went with some key takeaways. This will show the investor that you’re coachable and willing to seek outside advice and help. Remember you are trying to build a long-term relationship that is mutually beneficial to your company and the investment firm.
- Value Proposition: Spend a lot of time on your value proposition and how your product/solution truly meets a market need. Investors want to see that you are solving real problems with real solutions. Quantify your problem statement by expressing how many people have the problem you are aiming to solve. Be honest with yourself and make sure you know if you have an incremental improvement to an existing product or a revolutionary new approach. Investors will be asking themselves the same question as they evaluate your opportunity.
- Social Platforms: Don’t post stuff on social media or on public forums that will hurt your chances of being seriously considered for investment by an investor. Enough said here.
- Product vs Company: Truly assess if you have developed a product versus a company. Some products are better to license early on to larger companies with existing product portfolios. This is why financial and business acumen are so important because some products just don’t lend themselves to building out an entire company. Sometimes the economics don’t work out either due to scale, margins, intellectual property, industry, or distribution challenges. In those instances, it’s best to try and monetize your solution via licensing or technology sale. Make sure you’ve thought through this before you approach an investor for investment.
- Investment Terms: Make sure the amount of capital being raised and the investment terms match up with the investment firm’s thesis. If the investor only invests in priced Series A and B rounds with preferred stock, don’t offer common stock (unless you can justify it!). If an investor only invests in SaaS or technology companies, don’t pitch your life science or manufacturing opportunity to them. Ensure you are asking for the right amount, make it clear how the investment advances your company by explaining the milestones and goals you plan to hit, and know the runway the investment will provide (in months).
- Investment Vehicles: Learn the investment vehicles so you don’t come off as clueless. Know the basic differences between SAFE notes, convertible debt, KISSes, and a preferred stock Series raise to ensure you understand how each vehicle impacts your ownership and the ownership of the investor. There are plenty of resources on these topics, but one can use the National Venture Capital Association (NVCA) website, the Angel Capital Association (ACA) website, various books on startup financing, etc. to understand the differences.
- Team: Do you have a team and is it a team with applicable and complementary skills to grow a company at the stage that you are in? Teams generally illustrate your ability to attract talent to a competitive business opportunity. Your team’s experience can show an investor how viable your product is and instills validation that the product/solution is needed. Building and incentivizing a team can also signal that you are willing to give up equity for investment.
- Financials: Provide them in the format that an investor asks for and get help from professionals if numbers aren’t your thing. Please note, if numbers aren’t your thing, it’s best to start the process of making it your thing. Financial fluency is necessary for your business to be successful and as the company grows, understanding how numbers are impacted will ultimately enable you to make better decisions.
If you’re new to entrepreneurship, work with a CPA that understands startup financing to get you started properly. I cannot emphasize this point enough, as strong financial records and financial projections are a critical piece to investors’ assessments, and ultimately investment decisions.
Finally, it’s highly recommended to study common business terms and know where the business is headed using these terms. Common examples include:
- Monthly Recurring Revenue (MRR): is income that a business can count on receiving every single month
- Annual Recurring Revenue (ARR): refers to the monetary value of a subscription-based company’s subscriber base or the yearly value of a single subscription
- Run Rate: The run rate refers to the financial performance of a company based on using current financial information as a predictor of future performance.
- Cost of Customer Acquisition (CAC): Customer Acquisition Cost is the cost of winning a customer to purchase a product/service.
- Gross Margin: often expressed as a percentage and represents the percent of total sales revenue that a company keeps after subtracting the cost of producing its goods or services
- Lifetime Value (LTV): an estimate of the average revenue that a customer will generate throughout their lifespan as a customer
In general, most investors will be honest with you if there is absolutely no interest on their part to invest in your business. The common reason is that your business just doesn’t fit their fund’s investment thesis. But beyond this, the highlights and suggestions above can and sometimes do turn a relationship into an investment.