Getting someone to invest in your new business takes more than a great idea.
While the idea is critical, investors take much more into consideration when deciding whether or not to hand over some of their cash to a budding entrepreneur.
Michael Mocatta, an entrepreneur mentor in residence at the London Business School and a partner at Neta Ventures, said entrepreneurs need to know what to ask for and how to ask for it when trying to pitch investors on their plan. This includes knowing how to entice investors with their idea and asking for only as much money as is truly needed.
To help entrepreneurs get the most out of their pitch meetings and ensure the relationship is a win-win for both parties, Mocatta offers five tips:
- Don't put your idea first — the team is most important. Your team is what makes your idea happen. Potential investors are looking at the people behind the idea. Do you have a rock-solid founding team? A common mistake is a team presenting itself to a potential investor with a missing link, such as one that's still looking for the tech guru. It's also good to note that a startup doesn't have to be composed of a bunch of young people in their twenties. In fact, you'll stand out for the right reasons if the people on your team have experience as well as contacts. A diverse team with complementary strengths is what will turn an idea into reality.
- Create a simple tagline that clearly shows the benefit of your product or service. Very often entrepreneurs who live and breathe details of innovation find it hard to distill a concept into a simple idea that grabs the imagination of investors. You need to condense the vision of the business into a clear benefit that is compelling and dramatic. While similar to the elevator pitch, a tagline is even more succinct. Have this worked out before presenting your vision to others.
- Before you go to investors, have a plan for distribution. Having a great idea isn't worth anything if you can't get it into the marketplace. When you're standing in front of investors, you will sound immeasurably more exciting and attractive if you have already taken the steps needed to have a concrete trial market. I often suggest starting with a retail channel niche and then building the product backward. In other words — where do you want to sell your product? Answer that question and then build you product specifically for that market.
- Ask for only what you need. The vast majority of startups will come in with requests at set levels — and they're looking for a significant chunk of change. I push startups to ask for less money, however, and change their pitch to focus on a very specific goal, such as getting past proof of concept. Later on, they can do a second round of fundraising. This helps protect their stake in the business. The smaller the amount they ask for, the smaller they give up on equity. When it comes time for a second round of fundraising, the company will be further along in the development stage and therefore worth more. That means it will cost you less in terms of business equity. Demonstrating that you understand this makes you more credible to investors.
- Avoid the mistake of giving up too much equity too fast. This is a common mistake. An entrepreneur and any initial investors are hoping that the business will grow into something big, but as they go through multiple rounds of funding, their share of the company will really be diluted. By the time you've grown, we see founders left with only 5 or 10 percent of their company. In the end, the CEO doesn't even have sufficient skin in the game to promote a brand's success. The people driving the business forward should always maintain at least a 50 percent stake in the business. If you don’t maintain a large stake in the company, your "voice" will be diluted and other shareholders could outvote you.
Originally published on Business News Daily