For startup founders, having a great idea is just the start of the journey: once the startup has a product, a plan, and even a few customers, eventually, it’s going to need a cash injection.
Speaking at a YBF Ventures event yesterday, #CorporateAdvice founder Ronen Heine explained that the first quarter of 2018 was the best on record in terms of dollars invested into startups, with $952 million invested through 142 funding events.
In last year’s StartupMuster report, he added, some 67% of founders said they have received funding, compared to 40% in the 2016 survey.
“The odds are in your favour,” Heine said, “but founders still find it hard”.
So, how should founders go about getting that all-important investment?
With Heine moderating, a panel of investment experts laid out their top tips for startups to maximise their chances, while demystifying some of the unwritten rules of the pitching process.
Do your research
It goes against the advice of some accelerator programs, but Teresa Truda, co-founder and chief executive of Chozun, an app that matches travellers with activities that interest them, advised against the pitching-as-widely-as-possible approach, saying it can be better to do some research first.
“We were approaching all different types of investors who weren’t in our industry or they interested strategically,” she said
The pitch-all method just means a “shit load of rejections,” Truda said, and it can be easy to take that personally, or to start to believing there’s something wrong with the business, but investment firms have “their own criteria and their own mandate”.
Equally, startups are looking for strategic help and advice from their investors, not just money.
“Do your own due diligence on the types of investors you want to bring on board to your business,” she said.
“When you do meet these investors, ask what they can contribute to your business.”
She urged founders to “show your vulnerability”, and not to be afraid to show flaws in the business, and areas in which an investor could help.
That “really builds up that connection with investors,” she said. “They’re human.”
Equally, before even going down the funding route, startups should consider whether they’re ready – Truda says when Chozun came out of the Chinaccelerator program in China, on retrospect, she was not.
Entrepreneur in chief at Startupbootcamp in Melbourne Laxmi Pun said that before startups get to the fundraising stage, they should consider whether they need to go through an incubator or accelerator program first to get a proof-of-concept, and to gain “access to partners and investors”.
If nothing else, often investors are looking to “invest in startups who have been through that process”.
Adam Milgrom, a venture partner at Giant Leap Fund compared getting investment to a sales process. That is, at least, “once they like you”.
“You have to hook them in, and do the whole sales process … because they’re the customer. But, once you’re in deal mode, you can switch that and actually they become the one who has to sell to you.”
While having a killer pitch is important, Truda says the way Chozun got investment was not “through doing this big song and dance”, but through “having really great, genuine relationships, and building relationships over time”.
She and her co-founders Wil Pringle and Zia Word kept potential investors updated every month, telling them what had worked and what hadn’t, and – importantly – asking for advice, not money.
“When you ask for advice, they tend to give you some money because they feel they’ve got credibility and can add value to your business as well,” she said.
Don’t be too cagey
According to Milgrom, one of the biggest mistakes founders make when pitching their startup is to send a non-disclosure agreement with their pitch deck, or to password protect it.
An NDA request is a seen as a sure sign of “someone who hasn’t spent much time in the ecosystem”, he said.
“It’s such a faux pas.”
The pitch deck should only be used as a way to secure a meeting, so rather than worrying about confidential information being shared, “just don’t put any super-confidential in there”, he said.
Again, this comes back to treating the investor like you would a customer.
“You wouldn’t make your customer jump through hoops,” he said. “Be open, be transparent. You want to be on a journey with [the investor].”
By giving me a pitch deck, being open, and setting up a meeting, “you’re helping me do my job,” he said.
“Make it as easy and as frictionless as possible.”
Have the right people on board
Milgrom went on to lay out the three things investors always focus on: the team, the product and the market opportunity.
The most important aspect, particularly for early-stage startups is the team, followed by market opportunity, and then the product.
“Product is the absolute easiest thing to change or to fix,” Milgrom said.
“We’re focused on your team and why you guys are passionate about what you’re doing … and that you care about the problem you’re solving.”
But this doesn’t only come down to passion and personality. According to Pun, particularly for tech startups, it can mean having the right people, with the right technology expertise in-house.
“You can have your technical co-founder outsourced, but if that is a major part of your business, you’re already putting yourself at a risk,” she said.
From Milgrom’s point of view, Giant Leap Ventures has to whittle down 500 pitches to just five investments per year. The investors are always looking for reasons to say no.
“If you have a great idea, but you can’t convince any developer to work on it with you, you might not be a very good founder. That is a signal to us that maybe your priorities aren’t in the right place.”
Developers don’t necessarily have to be at a co-founder level, but “you do have to be able to energise your team to follow you on your vision,” Milgrom said.
Don’t worry too much about the numbers
When it comes to the financials, Milgrom told founders not to worry too much about getting it right.
“No one believes the financial model,” he said. “It’s complete bullshit.”
The only real reason the model should be there is to “show that you can think”.
If a founder presents a financial model that makes no sense, for example onboarding 1,000 new customers with no budget for a customer services team, that simply shows a lack of forethought.
“That is when financial models become important, but the actual detail of it is rubbish,” Milgrom said.
Equally, there’s no point in looking further ahead than two or three years, or in trying to prove profitability.
“It’s much more important to show you’re thinking,” he said.
For Truda, this advice rung true.
“I was awful at financial modelling,” she said. “I hate maths.”
“If it’s not your strength, reach out to people whose strength it is,” she advised.
Going through an accelerator helped Truda with this aspect, and she learnt to focus instead on explaining how Chozun was going to grow and be sustainable.
At the start, Truda and her team were presenting unrealistic financial models, but “investors see straight through it”, she said.
Once they had edited their projections and focused on the strategy, they realised “the numbers didn’t matter”.