The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “When is the best time to look for investors?” is written by Stav Vaisman, co-founder and CEO of OurPlan.
Startups are a source of both great opportunity and great risk, so your initial appeals to friends and family as investors must be thorough, well reasoned, and shrewd. My experience with startups has provided me with three crucial lessons about the need to present an investment platform that respects the legitimate concerns that your potential investors will have. These lessons will lay the foundation for appeals to institutional investors down the road:
Invest your own dollars and time first
Consider yourself the first investor. Nothing shows you believe more in your startup than proof that your own money is at stake. I had already put a substantial sum of my own savings—along with a few months of hard work and ideation—into developing the initial prototype for OurPlan before I went to my first investors. I know they perceived my investment as evidence that I was confident in OurPlan's vision.
Go to investors with more than just an idea
I didn't take a dime from friends and family until I was confident that OurPlan had immense potential for success. I had developed a minimal viable product, prepared a detailed business plan, and spent months fully immersed in solidifying the company. Most likely, your potential investors have done well for themselves. After all, they've got money to invest. They've worked hard for their success, and will conduct their own due diligence—so prepare accordingly. My presentation not only showed how the app would function and what it would look like, but how I believed it would disrupt and influence the way people make plans and interact. I didn't start pitching until OurPlan was actualized.
Show how your startup will make money
Few things impress investors more than data that shows your plan can be monetized. Conduct as much market research as possible. Even if your data is only qualitative, such as interviews with potential customers, market research provides demonstrable evidence that your business plan has been tested in scenarios that approach the real world of commerce. Your monetization strategy, and the likelihood of your startup actually generating revenue, should always be your north star when presenting.
It would be uncomfortable, and perhaps unethical, to ask for friends and family to invest in a half-cocked idea. Your first round of funding will likely come from the people you know and trust. But you must earn their trust through the creation of a startup that takes your idea beyond the brainstorming stage. Go to investors only after you've put in enough of your own time—and money—to flesh out your idea, including through initial market research. Your first round of funding will lay the foundation not only for the startup phase, but also prepare you to catch the biggest prize of all: institutional investors.