Business planning

A six step beginner’s guide to sourcing investors

StartupSmart /

If you’re an online entrepreneur with a startup idea, you’ll probably want to know how to find, work with and get the most out of investors.

 

Entrepreneurs take on investment partners for all sorts of different reasons. Sometimes it works brilliantly, other times it can take you off track. Here’s a couple of battle stories demonstrating both plus a six step beginner’s guide to finding your first round of investors.

 

Kate Morris, co-founder of online beauty store, Adorebeauty.com.au, recently sold 25% of her stake to Woolworths.

 

“This is a great opportunity for us. Having Woolworths as an investor gives us access to a wealth of experience, as well as powerful marketing and logistics resources,” she says.

 

Selling a stake can also go the other way, as Andre Eikmeier, co-founder of the online wine retailer Vinomofo, discovered when he came under fire from a big retailer operator looking to shut him down.

 

“Twenty months after launching Vinomofo we came on the radar of a big retail operator. They didn’t like the idea of an independent player doing things aggressively with price. They said we were ‘disrupting the supply chain model’,” he says.

 

So they did what any other smart startup would do to avoid getting crushed – they sought out an investor to secure some big buying power. It came in the form of the Catch Group, a big online retail company famous for their daily deals business Scoopon.

 

It all went well until it didn’t.

 

“Venturing with a big partner like Catch enabled us to have an effectively limitless bank account so there was a safety net, which is good and bad,” he says.

 

“It’s good because it allows you to make more aggressive decisions if you need to buy large volumes of stock. But it also frustrated us a little bit because it became a bit about ‘the Tuesday mornings sales report’ and being part of that bigger structure did take away that sort of connection we had with our audience.”

 

After much soul-searching, Eikmeier and fellow co-founder Justin Dry decided to buy their stake back. The consequences of reversing the deal were significant.

 

“On the first day of our new arrangement, without their backup, we had zero in the bank account. But then at 12:01 am the first sale came through and that was good because we had seven days to pay! So it was visceral again and it really charged us up,” Eikmeier says.

 

Many start-ups have learnt from the type of experience that Eikmeier and Vinomofo had, and are now more aware of what it means to be part-owned by another entity.

 

Jodie Fox, co-founder of the online design-your-own-shoe shop, Shoes of Prey, knows what it’s like to court investors, with big guns like Atlassian’s Mike Cannon-Brookes being an early investor.

 

Here’s her six step guide on what you need to know when sourcing investors:

 

    1. Decide if you want, need or have to have investors and be categorically certain what you will give up for their involvement and what you want in return.
    2. Look at the venture capital funds or angel investors who are interested in investing in your area and get a warm introduction to them.
    3. Treat the first meeting like a first date; get to know each other a little bit, share some information and agree to have another conversation.
    4. Consider whether you want just money or smart money. Smart money is investors and board members who will contribute to the business in terms of expertise or a network you can tap into for hiring.
    5. If all things go well, you’ll get down to the terms sheet, all those conditions on which you had agreed that the money would come into your business. Once exchanged, the due diligence phase takes place where they’ll go through all of your financials.
    6. If that all goes well then you do the legal paperwork. Once that’s completed and signed off you will have money in your account and you are off!

 

Working with investors can be a brilliant launch pad to world domination or it can severely restrict your style and vision. If you’re an online entrepreneur with a startup idea, getting your first round of investors will be one of the most exciting moments in your career. Just be clear on what you want from investors before you seek them out and be very clear about what you’ll give up in order to get them.

 

Bernadette Schwerdt is the director of the Australian School of Copywriting, an online marketing strategist and author.

 

Do you know more on this story or have a tip of your own? Raising capital or launching a startup? Let us know. Follow StartupSmart on Facebook, Twitter, and LinkedIn.

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