I started my first company when I was 25. Here’s how I convinced my seed investors to give me money.
My investor said to me with a chuckle, “I only invest in gambling, porn and children’s toys.”
I replied, “Well, it’s not quite any of the three, but it’s close enough to the last one. I’m starting something in educational books distribution.”
I was 26. I had been a banker for two years and wanted to do more with my life than just making rich people even richer.
My first seed investors were a retired audit firm partner, a financial controller of a listed company, and a semi-retired pilot who was a colleague in a stock-broking firm.
The financial controller was the first person I spoke to.
I met up with him on his invitation to catch up and my pretext of needing some budget modeling advice.
You see, people with money have lots of other people asking them for money. So meeting them on the pretext of wanting investment is seldom a good approach. However, successful people are usually quite willing to share and help others. So asking them for advice is always an easier way to secure a meeting.
If they aren’t interested, at the very least you would have gotten some useful advice. If they are, then it’s a much more subtle way to negotiate a deal then to say “hey I kinda of need money…” — in which case your bargaining power becomes much weaker.
I explained to him this business idea I had and showed him my spreadsheet with my ‘getting things off the ground’ numbers. He looked at it and said it seemed quite sound. Then he popped the question and asked, “Do you need investors?”
I said sure, if there was an opportunity to diversify my financial risk, why not.
Up till that point the startup had been bootstrapped by a former banking colleague and I. We were planning to start our marketing efforts by raising a small seed round to fund it.
The financial controller agreed to becoming a partial investor if another one of our mutual contacts was interested to come in with a bigger share. He called the chap and asked him to meet me.
I met my second investor for coffee near his place. This was the guy that said to me he only wanted to invest in “gambling, porn and children’s toys”.
The first two were a joke, though it is true that these two industries were one of the most lucrative and profitable around. The last item was because he had three young kids, and he knew first hand how overpriced toys were.
Being a very successful and retired ‘big five’ audit firm partner, he had practical questions for me beyond the opening joke.
Did I have proof of concept?
Yes, I did. My idea wasn’t new. It was pioneered by a couple who lived in the US and wanted to bring in Singapore textbooks for their own kids. Soon their local friends realized our curriculum was more rigorous and wanted the couple to buy it for them. An online shop doing brisk sales followed shortly for them. It got them into the news and I showed him the clippings and their website.
Did I have an edge?
Yes, I did. I had been teaching private tuition throughout my high school and college days to fund my school fees and I was very familiar with the curriculum from elementary school through to senior high. My students’ parents often entrusted me with the job of buying assessment books for their children. I knew the selection in the market really well.
Furthermore, I had begun to dabble in writing as an author and had gotten to know a few of the key publishers on a personal basis. While the couple in the US discovered the demand by accident and only sold key textbooks used by our schools, I had access to wholesale prices for the broader spectrum of non-mandatory assessment books.
How much did I need and why?
I showed him my numbers. I didn’t boast about how big the business could become. I just knew I had to raise about $60,000 to fund my first year of travel and promotion expenses at teacher conferences in the US.
These were smart guys I were talking to. They certainly didn’t get to where they were by being careless with numbers, especially given that they were accountants by training. Furthermore, this guy in front of me had children and he knew this business was attractive. Parents were willing to spend a lot of money on their children’s education.
He gave me one final condition: I had to secure a big distribution contract from one of the key publishers. I got on the phone immediately.
I met up with a big publisher the next day. I explained to the general manager what I was attempting to do. We talked terms and came to an agreement.
He prepared a distributor’s contract for me and I signed there and then.
I faxed the investor from yesterday the contract. He kept his word and called me back to ask when I could come to collect his cheque.
With him on board the first investor, I met also opened his purse immediately.
I had already secured pretty much most of the funds I needed. By the end of two weeks, I had most of the key educational publishers in Singapore signed up, some exclusively to me for the overseas market.
I was working as an independent stockbroker then so that I had time and flexibility to get my startup going. A few days later I was in the office and chatted casually with a colleague who sat next to me.
He was comfortably retired from being a career pilot and aviation instructor. I told him about my plans for the startup and the two investors I had secured. He had two children in their teens.
He decided he wanted to come in with a small share. I accepted. He was the oldest of the lot and could offer a lot of useful advice and contacts. Plus he was a great guy!
The truth is, I had already known the first two investors for about two years. We were all part of the same university alumni association. That is why I’d put networking as the most important aspect of fund raising in my story ‘The Truth Behind How Venture Capital Chooses Startups’.
I also have to confess that this first startup was a failure. At the end of three struggling years I sold the intellectual property and branding for a bit of money to an industry figurehead. I was tired and burnt out, but I also learnt many precious lessons about cash flow management and doing more thorough market research. I shall tell that story another time…
Meanwhile a brief recap of the pointers here:
- Make sure you have proof of concept.
- Find your edge; what makes you or your startup a good bet compared to others?
- Do your market research and come up with a budget. Be realistic about your financial projections.
- Make sure you approach the right investors who have both the money and the interest in the space you are going into. Don’t just approach anyone!