If you're looking for startup investors, having a good business idea is only half the battle. You won't convince them based on your idea alone. The person deciding whether your business is worthy of their investment requires a well-thought-out plan, with details about the business, its growth potential, target market and more.
Business News Daily spoke with Michael Mocatta, partner and COO of Neta Ventures, and Keri Gohman, president of online accounting software company Xero Americas, about investor pitch meetings and how to ensure the relationship is a win-win for you and your investors.
1. Show investors you're a low risk.
Benchmarks for raising venture capital have gone up over time as the cost of product development has decreased, said Gohman. Investors need to see a realistic business model and, in many cases, some initial traction. They also want to see how well the business has been thought out, an acute understanding of the business's unit economics, and the lifetime value and cost of customer acquisition.
"Investors like to fund growth, rather than product development," Gohman said. "A startup needs to be able to show an investor month-over-month growth over a certain period."
2. Sell them on your team.
Your team is what makes your idea happen, and potential investors are looking at the people behind the idea.
"When fundraising, it's important for business owners to show that they've been able to recruit a team, inspire the team to develop a solid product, a small subset of people who like using the product, and that the product has grown toward product-market fit," Gohman said.
Mocatta noted that a common mistake is presenting yourself to a potential investor with a missing link, such as when you're still looking for the "tech guru."
"You'll stand out for the right reasons if the people on your team have experience as well as contacts," he said. "A diverse team with complementary strengths is what will turn an idea into reality."
3. Create a simple tagline that shows your value proposition.
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, said Mocatta. A tagline is even more succinct than an elevator pitch, he added, so have this worked out and memorized before presenting your vision to others.
To define a meaningful vision, Gohman advises going beyond the business's day-to-day operations and think about the "why."
"A business with a true vision empowers those involved, giving them a reason to wake up in the morning," Gohman said. "A vision should be used as a north star, guiding an organization in everything it does: hiring, development, customer acquisition, [etc.]."
4. Have a plan for distribution.
Having a plan and some initial traction for distributing your product or service is not a nice-to-have; it's a must-have, said Gohman.
"An entrepreneur needs to have clarity on what they're selling to their customer and how they'll reach them," she said.
Gohman suggested running a few test scenarios to understand how your distribution and demand work. Ideally you should have initial partners or contracts locked down to demonstrate that the business idea can get off the ground.
"I often suggest starting with a retail channel niche and then building the product backward," added Mocatta. "Where do you want to sell your product? Answer that question and then build your product specifically for that market."
5. Have your finances in order.
Gohman said that one of the most important parts of being investor-ready is already having finances in order.
"Business owners should establish a relationship with a banker and an accountant so they have a clear understanding of where the business stands," she said. "Using a platform that has deep integrations with banks allows business owners to simply and quickly compile high-integrity financial data and give investors a clear, up-to-date view on how the startup is tracking and the company's true financial position."
So how much should you ask for? Mocatta pushes startups to ask for only what they need, and change their pitches to focus on a very specific goal, such as getting past proof of concept. Later on, they can do a second round of fundraising, he said.
6. Don't give up too much equity too fast.
Investors typically look for equity in your company in exchange for their investment. As you go through multiple rounds of startup funding, your share of the company will be diluted – and this is a mistake you should avoid at all costs, said Mocatta.
"By the time you've grown, we see founders left with only 5 or 10 percent of their company," he said. "In the end, the CEO doesn't even have sufficient skin in the game to promote a brand's success. If you don't maintain a large stake in the company, your 'voice' will be diluted and other shareholders could outvote you."
Additional reporting by Chad Brooks. Some source interviews were conducted for a previous version of this article.