I often have meetings with entrepreneurs who are in the early stages of their ventures and are trying to approach seed investors while, at the same time, cope with their product offering on a narrow budget.
Approaching investors is not an easy process. While finding investors may be easy, the hard part comes when you need to pitch your idea to them. There are many kinds of investors, so there isn’t only one right way to approach an investor, but there are proper ways to pitch your idea and also to anticipate and cope with some of the feedback you might receive.
The Different Types of Seed Investors
The first type of seed investment comes from friends and family. This is usually the fastest way to get the money you need, although it is limited in capacity and also does not include much potential for further investment or future ability to provide assistance in building up the venture. Friends and family investors are based more on a bond of emotional trust rather than on their ability to judge and analyze the offering or the team. So getting investment from friends or family should be the last resort, not the first, if at all. Not being able to raise money from other type of investors may sometimes mean that you will not be able to approach them in the future when the need for a larger amounts will come.
The second type includes investors which have the knowledge and know-how in the industry and usually have a portfolio of several companies in which they already invested, they are sometimes referred as angels. This type of seed investor is diverse on the amount of money each can invest and the opportunity is there, if it exists at all, to join another and bigger round of investment when needed (Round A). Some of them invest together with other angels which allow them to bring a bigger amounts of money while leveraging the risk per each investment. Investment angels also usually have a strong network which may assist the venture in its early stages by connecting the development process to potential customers and valuable marketing channels.
Third type includes venture capital funds. Most of these sources will not invest in early seed whereas only the minority would be willing to put up an initial investment or loan for you. This source is valuable because it also provides assistance in bringing the venture to market. The process of getting an investment from a venture capital fund may take more time in comparison to the previous described investors. Not only that, but it will also bare more terms and conditions which the venture needs to accept.
The forth type of seed investors are various different types of incubators and accelerators out there, where each has its own unique model for distributing funds. In general, incubators and accelerators give more than just money, they also provide a new venture with the infrastructure it needs to grow within, while in turn, taking a bigger share of the holding in the new company
What to Expect when Approaching Angel Seed Investors
I believe that, in most cases, the venture does not need a huge amount of capital from day one. Not a lot of money is required just to make a proof of your concept or to build your Minimal Viable Product either. Taking into account the amount of the initial investment needed and also the ability to get this money fast, I believe that the best type of investor to approach are angels, you need to take the following into account when pitching your idea to them.
To start with, remember that each investor is different. Their given hunger for risk, their net worth, their previous experiences and even the amount of money they are willing to risk, these factors all determine that which makes each investor unique. Consequently, there is some basic information that you need to collect prior to approaching any specific seed investor. This kind of information is essential for you to be able to answer his questions and concerns, as well as to understand his preferences.
When analyzing a potential investment opportunity, an investor might juxtapose the importance of the venture idea with the quality of the team of people behind it. Some investors, in fact, will place more importance on the team rather than the idea itself. Hence they would rather invest in the ability of the team to deliver the goods rather than assume that the idea, if good enough, will be successful no matter what team is assembled.
Another insight when planning your approach to an investor is to count on his ability to help you with the process of building your Venture. Money is not the only thing an investor can help you get, and some may be more valuable if they become more actively involved in the process. While keeping an eye on their investment, they can help get the right people involved and connect your startup with valuable marketing channels and connections.
Checklist – Preparing to Approach Seed Investors
I suggest that you keep in mind the following checklist when approaching seed investors.
Before You Meet with a Seed Investor
- Research your potential investors professional background in order to understand how it can correlate with your venture (use Google search, their LinkedIn profile etc.)
- Gather information about the previous investments he made.
- Understand how can this investor can help you in other ways rather than just give you money
- Understand his ability to invest in future rounds rather than just give a one-time initial seed investment
How to Prepare your Presentation in Advance
- Put a lot of effort in showing your investor the team behind the idea, put the same amount of effort in this as you do in explaining the idea and its potential success.
- The business plan is important. While multiplying numbers which shows a lot of potential is easy, showing how you are conservative in using the investment money and knowing how to give the best value for it, is the hard part.
- Make sure you manage to pitch the idea within the initial part of the meeting, leaving you with enough time for further discussion. Try to learn as much as you can from their questions and insights.
- Make sure to make a good impression. In order to gain your investor’s trust, convey that it is about you and your team’s ability to create. By cultivating a right atmosphere where two people can speak and listen with empathy is always helpful.
- Be responsive to your investor body language and inputs, make sure you don’t go into too many details when it is unnecessary but at the same time try to understand what needs more sharpening
- Don’t fall for each negative feedback received from an investor. Some will think you have a great idea, while others will not. This does not necessarily tell you that you don’t have a great idea, but remember that it is a lot to expect everyone to be behind it. Each investor has his own preferences and unique point of view, take things in stride.
- We have yet to discuss the valuations and terms of engagement, but at this point the best thing to have is a good lawyer working beside you to make sure you will not sign any terms which you will one day regret.
Summary – Which Type of Investor is Better?
In this post, I placed most of my focus on approaching angel seed investors because I think they are in most cases the best solution for getting the initial seed funding you need. Angel investors can bring both value and money to the enterprise. Before you meet, spend some time researching and preparing for your meeting with each investor. This is essential in order for you to be able to pitch the idea in a manner that will be attractive for the specific investor you are meeting with. Some advance preparations allow you to leave a good impression of you and your team.