Tech startups have a long journey ahead of them. Only half of all startups survive after five years, and the main reason is a lack of capital. Securing funding from angel investors and venture capital firms takes a great deal of work, and tech startups can require several rounds of funding before they’re able to stand on their own or get to an IPO.
In the pre-seed stage, founders invest their own money in what they’re building. Family and friends may get involved as well, but the funding stages don’t begin until outside investors get involved. Usually, this begins with an angel investor (a private investor who focuses on small businesses and buys equity).
If your startup is ready to find seed-stage funding, this guide will help you prepare your plan to secure funding.
1. Solve a Real Problem
Everyone has an idea for an app. What’s much harder to come by is a solution to a real, specific problem or pain point faced by consumers or businesses who will want to use your technology. That may mean more than having a brilliant idea. It can take real industry expertise to identify those pain points and figure out a path to apply new technology in a way that provides real value to users.
True innovation comes from companies that can pinpoint a real problem and find a way for technology to change things. Take Nobul, an open digital marketplace in the real estate industry. Its value is that it targets high realtor fees and a lack of information about agents before clients sign up.
By applying the marketplace model to this opaque part of the real estate industry, they’ve radically changed the dynamic between consumer and agent. According to industry maverick and the Founder of Nobul, Regan McGee, the company’s success hinges on its differentiation from competitors and targeting a major pain point for consumers:
“A lot of people claiming to be disruptors and innovators in the industry are doing the exact things that have been done for decades. I’ve never seen anybody doing close to what we’re doing to create a consumer-centric experience. We’ve massively simplified the whole process. People think buying and selling real estate is complicated, but that’s a way for agents to justify their fees.”
2. Find the Right Business Model
Choosing the appropriate business model will go a long way toward proving your value and ROI to potential investors. You need to match the business model both to your product and what clients want. A subscription model won’t fit a product or service that people want to use as a one-time offering. A marketplace model requires some kind of value-add that attracts customers and will lead the industry.
3. Build Your Investor Pitch
Your business solves a real problem, your business model is the right fit for the product, and you have a solid foundation. Now you’re ready to go out in search of investors with an investor pitch. Your pitch is where you have to bring your A-game. It’s how you introduce your idea and your company to potential investors and make the case that you’re going to bring in incredible returns.
These tips will help you develop an investor pitch that will speak to investors and build their confidence in your ideas and abilities:
- Be prepared to answer any and all questions they ask. You want to demonstrate that you know your industry and your product down to the last detail.
- Stick to a 5-10 minute window for your presentation, and make sure your pitch deck doesn’t include more than 10-15 slides for a first pitch. This is usually the pitch you make to get a chance at a longer, more detailed presentation, which is usually about 20-30 minutes plus questions and discussion.
- State your goals clearly and concisely within the opening 30 seconds. Tell potential investors what you can do with their funds.
- Start broadly with the big picture and gradually narrow your scope with your steps, more information, and the evidence you need to support your claims.
- Tell a story that will make your pitch stand out, feel more personal, and start building a relationship with the investors.
- Make sure to leave time for questions and answers.
Nailing your investor pitch is an essential step in securing capital for your startup.
4. Target the Right Investors
Startups that target the right investors will not only have a higher success rate with their pitches, but they’re also more likely to find a cooperative partner who will help them achieve their vision and offer the right terms.
It helps to know the different types of early investors out there.
1. Angel investors
These are private sector investors who are usually individuals rather than entire firms. They’ve staked their careers on finding high ROI companies at the early stages. Some may want to play a larger role in the company as you grow, such as requesting a seat on the board, and their expertise can prove invaluable. Investments typically range in the tens to hundreds of thousands.
2. Venture capitalists
These investors seek out high-growth companies and want to play an active role in guiding startups toward success. Investments from venture capitalist firms tend to be in the millions, and they seek out businesses that are prepared to rapidly expand and deliver a high ROI.
3. Crowdfunding
Crowdfunding takes your search for capital to the public. It’s a model that’s worked well for video game studios and other tech companies that can build up a fanbase and offer an entertainment product in exchange for their early investment.
5. Close Your Investor Agreement
Even if your pitch is a huge success, you still have to ace the closing process. You want to make sure potential investors have a clear concept of the benefits of investing in your company.
These are the keys to a successful closing agreement:
- They know which direction you’re going and have a clear and accurate picture of your potential ROI.
- You’ve listened to the investors’ concerns and communicated your own expectations in the business relationship.
- You may need to compromise on certain elements if you want a major investment. Understand what your hard lines are and work within them.
- Set a clear timeline in order to give the investors a certain sense of urgency so that you can get your investment in a timely manner.
Raising capital is essential for the growth of your company. Before you set out to find an investor, understand what kind of value you give investors, know who you should be targeting, and create a winning investor pitch.
