First I need to clarify: I use venture capital in the title of this post because so many people in the real world apply the phrase venture capital to any investment that isn’t friends and family, personal savings, or a business ally establishing a joint venture. Technically that’s the wrong phrase because venture capital is really only a small number of professional investment firms charged with professionally investing other people’s money in startups or growth companies.
Real venture capital is a very rarified subset of investment in startups. Most of it comes in amounts in millions of dollars, invested in companies that are already launched, growing, and needing follow-on investment. That happens fewer than 5,000 times in an average year in the U.S. And that 5,000-per-year venture capital investment compares to roughly six million startups in an average year in the U.S. If your startup is really a candidate for venture capital, you know that already, and you know how and where to get it. If you are that one-in-a-million company that gets venture capital right at the beginning, then hats off; you should be very proud.
What you are probably looking for, if you’re reading this post, is angel investment. Angel investors invest in about 75,000 startups in an average year, in the U.S. Angel investments are way more likely than venture capital to occur in a new company. A first investment in a new company is usually called seed, or seed stage, and almost all of that is from angel investors.
For more on the difference between venture capital and angel investors, try this post: What’s the Difference Between Angel Investors and VC?
And for more on what angel investors want, how to approach them, mistakes to avoid, try this link: articles and posts on angel investors in bplans.com.
With that as background, here’s my summary of how to find investors for your startup:
- Review your startup’s suitability for investment. You need to have five essentials: good growth potential, scalability, defensibility, an experienced and credible management team, and a reasonable prospect for eventual exit. For more on those, click here. And you have to have them in the eyes of the investors, not just your own assessment. Many investors would add a sixth: traction. By that they mean hard evidence of market need and product-market fit, with users, subscribers, clients, distributors, customers, or something else, depending on the nature of your business.
- Have at the very least a lean business plan finished. The lean plan includes strategy, tactics, milestones, metrics, and essential numbers on projected sales, spending and cash flow. For working with investors you should have a summary memo that summarizes that plan, and a pitch deck ready to go too – both of these are outputs of the plan. Beyond the lean plan, you’ll want to have an executive summary, a pitch deck, and – unless the pitch and summary cover these well, additional descriptions of the management team, competitive edge, and market analysis. If you’re operating in Internet space in the present market, make sure you are generating traffic and focusing on marketing much more than profits.
- Develop your summary. Summaries are critical to the investment process. You don’t send business plans to investors until they’ve asked for them. Instead, you send summaries to establish interest. Many investors prefer emails with a summary memo attached (just a few short paragraphs) to in-depth written summaries, so you need to prepare both: a compelling pitch deck to communicate with investors, and a brief but exciting email, one page at most, outlining the growth prospects, type of business, and potential investor payoff.
- Select investors carefully. Don’t shop your plan. Instead, research your potential angel investors carefully, looking for deal size, industry, and geographic preferences that match your plan. I suggest you register and participate in gust.com, an angel investor platform that is free to entrepreneurs; and also Angel List, 500 Startups, and keep your eyes open for others.
- Approach selected investors correctly. For the angels whose criteria match your plan, find out how they want you to communicate with them. Gust.com and the others have their own procedures, and it’s good to follow their lead. Know whether your target investors prefer email summaries, summary documents, pitch decks, phone calls, or whatever. This is a matter of millions of dollars, so do it right.
- Make sure you have a good relationship with an experienced attorney. You definitely need the right legal help to make a real deal. Make sure your attorney has been through similar deals; if not, then they should recommend a specialist instead. Investment deals are serious business.
- If you don’t find anything, what’s next?
- Gust.com. Formerly angelsoft, gust.com is a platform used by angel investors and angel investment groups. Entrepreneurs establish a profile on gust.com, and investors can see it. The angel investment group I participate in uses it to receive and study submissions.
- Angel List, offering listings of angel investors and for angel investors.
- 500 Startups, Dave McClure’s “global family of startup founders, mentors, and investors.”
- The Funded: a resource, database of entrepreneur reviews of venture capitalists and angel investors.
- Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups. Written by David Rose, founder of Gust.com. A comprehensive guide to angel investing, from the investors’ point of view
- The U.S. National Venture Capital Association has an easy-to-use listing of hundreds of VC firms, including web links.
- U.S. Western Association of Venture Capitalists. More than 100 of the better-known mainstream VCs.
- America’s business funding directory. Fill in your profile, and if your plan is interesting, lenders and investors will contact you. Free to the entrepreneurs.
- British Venture Capitalist Association.
- Canadian Venture Capitalist Association.
- Google listing of venture capital firms.