Eirik Nerdal from the Angel Challenge program on how to find the right investors
Searching for investors should be an exciting adventure in your startup journey, but beware! It’s not just walking on rainbows to your first capital raise. Pack your bag with the right kind of expectations, knowledge and plans.
Eirik Nerdal from Angel Challenge has heard many stories of both successful — and less successful — attempts of startups seeking investors. He has met and taught hundreds of startups about the value of being thorough and cautious when trying to find investors. In the process of teaching young startups about the perils of being careful, Nerdal has also met startups that are not careful at all.
For the early stage startups, when is the best time to start looking for investors?
The rule of thumb is that if you raise capital for 18 months, you should expect up to 6 months of doing the fundraising. This gives you 12 months of actual ‘startup crunching’. This leads to the question: How much runway do you have left?
Remember that it is better to wait, than to make deals with the wrong investor. In fact, most times, you should wait as long as you can before making any kind of deals. Why? Having investors is naturally an ambition to many founders, as it is an early ‘proof of success’. And the right group of investors may generate company value beyond the amount of capital they invest. But you must remember that the greater traction you can show for, the higher valuation you may get — and the less you would need to sell your shares, says Nerdal.
However, it is never too early to look for investors, and never too early to meet them either. Keep them informed on your traction. Create processes of capturing the interest — keep them updated on your development monthly or quarterly to mature them, and make them more interested over time. This is the best way to reduce the amount of time spent on raising capital. Remember to include investors who are more relevant for later fundraising stages.
To a startup eager to do fundraising for the first time, who are the investors and where do I find them?
Let’s break the myth right away: An early stage investor does not need to be a senior male with grey hair, leather briefcase, suit, and a tie pin. An investor in 2020 is ‘all over’ the spectrum of people — some out in the open, others in the background waiting to find a quality founder to invest in. Some investors might also be doing their first investment.
I recommend you to start by identifying what investor resources your startup may benefit from. Focus on the experience, potential network introductions or people you need on the inside to accelerate. Investors often invest where they can see themself contributing or at least understand where you are going, says Nerdal.
The next natural step would be to figure out which reachable ‘stars’ of potential investors that exist in your needed categories. Maybe you already know of someone in your immediate or extended network, or somebody who can do an introduction to a special candidate for you?
In a world so largely dependent on references and connections, how can you get in touch with your preferred investor?
The answer is partly not to settle just for doing ‘warm introductions’ — when in fact ‘cold introductions’ can work equally well.
There is not a single recipe. Everything works. The one thing that keeps holding people back from reaching out is the terrifying “NO”. Move on! There are plenty of good investors out there — and how you manage rejection can also determine a lot of your potential success, says Nerdal.
He adds:
If you are digging into the online world of business, one key thing to look for is companies related to your industry which have come further than you, and to look at who invested there early on.
Other concrete actions to recommend are attending startup events, signing up for investment programs, ‘meet-ups’, getting close with relevant clusters and other innovation environments.
Start to ask around — the startup communities are often much more inter-connected than you think, says Nerdal.
Angel Challenge offers startup alumni the opportunity to showcase their ongoing fundraising campaign monthly to 450+ investor alumnis through newsletter.
First impressions to remember
A common misconception in the startup community is that you need a stage to do a pitch. So where do the first impressions happen?
Remember this; ABF — Always be fundraising. Have the elevator pitch ready together with the expected timeline of your upcoming fundraising campaign. Dont feel obligated to open a round for the new investor you just met. Think efficiency and make fundraising one continuously ongoing process, says Nerdal.
At the investor meeting
Once you have arrived at the investor meetings, how do you ‘vet’ a good investor from those that are unfit for your startup’s needs? You don’t want to take the startup in a direction that isn’t beneficial to the plans you have for your innovation and company.
Doing ‘due diligence’ before an investment isn’t just a task belonging to the investors: It is also a process startups should invest their time and effort in. For this sake — and for the sake of making a good first impression — startups should bring questions when they are meeting investors. This ties in with the need to keep ‘cool’ and not get overly excited by an investor’s interest in the startup: You might decide they are not the perfect investor for your innovation after all. Nerdal says you should focus the question on the topics that matter to your startup: The investor’s investment history, preferences, mandate, and what they may offer outside of capital. And of course, it is allowed to reference check investors.
Investor meetings are exciting learning opportunities for a startup, but how many should be involved in the meeting?
Only the most relevant people should be there. By this I mean the people that are responsible for the fundraising. If someone doesn’t say a word during the whole meeting, they will seem quite ‘out of place’ — and that can potentially harm the first impression. Perhaps you should wait until meeting two or three with bringing the CTO or CPO.
So…. Do you want to invest? 🧐
Do not forget that necessary investor meetings are part of a sales process — and the fundamentals of a good sale also apply when meeting investors, says Nerdal.
Which means it has all the fundamental steps of a sale and the total timeline as an campaign. Of course consider input from investors you meet, but still remain the leader of your own fundraising campaign. From setting goals, to prospecting to the final closing. Asking for yes/no should be in there, and can be used with different levels of commitment at different stages in the process. Of course consider input, but still remain the leader of your own fundraising campaign.
One element that many tend to underestimate is the time it may take to handle objections or mitigating the due diligence gaps, as would be the correct wording in your case. Preparing for this by creating a due diligence data room in advance, updating it regularly and making sure all agreements that need to be in place is there, is essential for reducing the estimated 6 months, and can do so drastically.
Picking the wrong investor: An expensive lesson
The wrong investor can have major implications for your startup journey — just like the right investor can provide tremendous value for you.
Nerdal says that having alignment with your investors on ambitions, goals and expectations are key for the company’s long term success.
So what can happen if you are careless with who you hand investment contracts to? Maybe you didn’t clarify the boundaries, rules, and responsibilities well enough in the term sheet, perhaps you didn’t do your due diligence thoroughly, make sure the IPR was bulletproof and could not be exploited, or perhaps you never realised that your innovation wasn’t unique? Either way, the road is full of potential traps for your startup.
Having contracts and things in writing is very important — no matter who the investor is! At an early stage we tend to take the other party’s word on certain things, but if you don’t have it in writing and the startup increases its valuation with 10x, opinions might change — and what was trusted by word may end up in destructive arguments.
