How to Convince People to Invest In Your Startup
Recently, I rode the Amtrak across America, visiting 12 cities coast to coast. In each city, I met dozens of entrepreneurs — credible, legit ones — eager to start their first business, but were struggling to raise the money to do so. It was an eye-opening experience. I’ve taken for granted the vibrant ecosystem in Silicon Valley, and was reminded that the rest of the country is different.
While more difficult outside of major tech hubs, it’s always possible to raise funding, and a recent law change will soon help even more. Here are some concrete tips for first-time founders.
1. Do the thing you say you’re going to do.
Investors are turned off by excuses. Your most important task make potential investors feel that you are going to get things done no matter what. Investors back those that prove they can do a lot with a little; those that are a force of nature. The best way to appear formidable is to actually be formidable. Get it done.
2. Start small — trivially small — and then build up.
Want to open up a restaurant, but can’t afford it? Start with a pop-up. Can’t afford the pop-up? Make a deal to work in someone else’s commercial kitchen, specialize in a few meals, and personally deliver it to local offices. When you are first starting, your goal is not to immediately build a huge business — it’s to prove that you can add a small ounce of value to people. Eventually, investors will help you get to the next level.
3. Make three people love you. Then 10. Then 100.
Do whatever it takes to make three customers love what you are doing, and then build up from there. Your goal is to build a community of supporters, step by step. Your eventual investors will likely be sourced from this pool of supporters, their friends, or the people they talk too. Word gets out.
4. Ask for advice, not money.
Wealthy people are asked for things a lot. It can get annoying. Think how you’d feel if someone you barely knew launched into a pitch about how you should invest, treating you like a bag of money instead of a human. However, most decent humans (i.e., the sort you’d like as investors) enjoy helping promising founders that prove they can get things done. Your goal is to build a relationship, and to seek out mentors who you respect and who respect you. They’ll likely invest eventually.
5. Be authentic.
Avoid being superficial or overly “salesy.” One way to build a relationship with potential investors is to be upfront about your challenges and struggles, and involve them in your battle to surround them. Convincing someone to invest in you is about building trust — trust in your ability to think through difficult situations, and faith that you’ll do the moral thing.
6. Consider an equity crowdfunding campaign when the time is right.
This past May, the law changed, meaning businesses can now raise up to $1 million from their friends and neighbors. Unlike Kickstarter, equity crowdfunding allows people invest in stock, loans, or a revenue share. If you’ve followed the first five steps, you’ll likely convince at least one wealthy investor to invest a significant amount and set the terms. You might also have a following of a few hundred supporters that would gladly invest. Once you are at this point, an equity crowdfunding campaign can help. Set the minimum target at the smallest level to get you to that next step, even if it’s just $20,000, and then set more grandiose goals if you raise $50,000, $100,000, $250,000, $500,000 or $1 million.
7. Leverage the ‘social proof’ from crowdfunding.
One challenge of fundraising: no one likes being the first investor. It can be extremely difficult — and take months — to convince just one person to invest $10,000. Thankfully, there’s a flip side: after each new investor, it typically gets easier to find the next one. Investors assume — rightly or wrongly —that there is safety in numbers. If you start an equity crowdfunding campaign, your goal is to accelerate the momentum as fast as possible by leverage this social proof.
If you’ve been struggling for capital, and don’t know where to start, I hope these tips will get you on the right path. If there’s one overall piece of wisdom, it’s to start small and take things step by step. If you have a goal to climb Mount Everest, the scale of what you are attempting to accomplish can be intimidating. Just take it one rock at a time. It’ll seem easier.
Nicholas Tommarello, co-founder of crowdfunding platform Wefunder.