How to Get Investors to Give You Their Money
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 “What’s the best way to pitch a startup idea to investors?” is written by Marten Mickos, CEO of HackerOne.
These days, starting a company is relatively easy and barely costs a dime. Securing venture funding to make it a hyper-growth business is another story.
In my own career, I have raised venture capital half a dozen times for a total of over $100 million. Once was a successful series A funding round right after my previous company had gone bankrupt in 2001. I remember being so determined to make up for the recent failure. The investors noticed, and their funding helped produce one of the first European unicorns, MySQL.
Several years later, it was a large series C funding round driven by optimistic growth numbers. The funding gave us the fuel we needed to make it through two years of treacherous market conditions before receiving an attractive acquisition offer from a key player in the space.
After much experience as an entrepreneur and angel investor, I can tell you that in order to get investors to give you their money, you need to get three things right before you even ask for a meeting. The first is you. Every day, you will face situations you are unprepared for. Investors are looking for founders who can take on the unexpected without missing a beat. You need to be strong and driven, yet coachable. You need to be confident, yet humble and ready to learn. You need to have a crazy passion for your pursuit combined with a cold rationality about what will work and what won’t. And you need to be adaptable.
If the first thing to get right is you, the next is the market opportunity. It needs to be big and growing. It needs to be underserved. It needs to have a long lifespan. And it needs to be possible for innovative technology to address the unmet market need in a way that is 10 times better than any current method. That’s what’s compelling.
The third major thing to get right is momentum. Developing the first software and first product is relatively straightforward and free of cost. Investors want to see evidence of real progress—demonstrable momentum in product development, customer acquisition, and market awareness. If you have nothing to show, you will not get investors.
Now, with the best possible you, a great market opportunity, and real momentum, you are ready to talk to investors. Here’s what you do:
Arrive by referral
The best way to arrive at a VC’s office is with one foot already in the door. Random contacts may give you a first meeting, but they rarely lead to investment. It’s a small world, and everyone believes that all good people are connected. From an investor’s point of view, if you can’t find someone to make an introduction, then something must be wrong with you.
Ask for advice
When you meet with investors, don’t ask for money—ask for advice. It shows that you’re open to input and that you’re not desperate. No sane investor will invest in a desperate entrepreneur. As discussions continue and the investor feels you’re listening and taking their advice to heart, they will develop a natural interest in giving you their money.
In summary: If you ask for money, you will get advice. If you ask for advice, you will get money.
Know the lingo and be ready to talk details
Investors want to hear you talk about financial projections, headcount plan, cash burn, investment size, and runway. Make sure you also know the basics of a term sheet so you can discuss the contents of it intelligently. The same goes for shareholder agreements, liquidation preferences, and other such terms and conditions. Be especially clear about pre-money valuation and post-money valuation (and stick to your guns).
Shoot straight and stick to what you know
During the course of your meetings with investors, they will test you. Be careful not to make the classic first-timer mistakes. For example, when investors ask how you will make money, don’t say that you have many revenue models. That’s an admission that you have no idea how to make money. You might as well admit it then.
Great companies have one, or perhaps two, revenue sources—not more. Similarly, never think or say that your company does not have competition. That’s the same as saying that there is no market opportunity.
Focus on the opportunity, not the exit
Whatever happens, don’t bring up “the exit plan.” Focus on how you are building a great business and are going to make them rich. If asked, tell the investor that building a great business is your sole focus. If you succeed in building a great business, you will have options available to go public, merge, or be acquired by another company. If you don’t have a great business, every exit plan will be miserable for you.
In all your doings with investors, tell a clear and compelling story and pay close attention to managing expectations. Investors will want to meet with you several times before making an investment. This has nothing to do with uncertainty about the market opportunity. It is because they want to see how you are performing.
At each step of the way, you should have some good news—some momentum—to report. So don’t give away all the good news in the beginning. You will need good news every time you meet with them. Remember: It’s much worse to waste an investor’s time than their money. Money exists in nearly unlimited supply. Time is a limited resource.
In the end, the way you win over investors is by showing that customers will trip over each other to pay you money. You are doing this business because you are passionate about it. But investors are not passionate about any business. They are just passionate about winning. Show them that you are their best path to winning, and the funding will follow.