Have you invented something amazing? Do you have a unique idea?
You might be thinking that it is the right moment to set up your company and pitch your idea to investors.
Wait! Don’t rush. Planning and organizing are the two major factors before you pitch your business to investors.
Ensure your idea is well-built and sound and also you are focusing on all the proposal details that investors might ask about. For example, you should be able to articulate your vision for the short- and long-term future of your business and have a solid understanding of your target market, competitors, suppliers, and target audience. Besides, you need to be clear on what kind of investor partnership you want.
In this article, we will discuss the significant points you should think about before pitching your idea to investors and provide indicators that you are ready for this step.
Steps Entrepreneurs Should Take Before Pitching to Investors
Entrepreneurs often focus on getting funding for their ventures and choosing the kind of investor—venture capitalists or angel investors, for example—that is most appropriate for their venture. Finding investors, though, is just half the fight. Using that funding to grow your business smartly can ensure your victory. These are the 7 major steps to take before going to investors:
1. Understand Your Needs and Wants
You need to be clear on what you exactly want. Are you looking for funds to acquire assets like talent and equipment? If this is your need, you should consider going for a partner who already has those resources and looking forward to working on a revenue-sharing basis.
You want an investor who can guide you in your business operations, apart from providing funds. To what extent do you want your investors to be involved in your company?
Before you decide to move with any investor, make sure you are comfortable with the connection by setting the right boundaries. Give your opinion on all these questions and be ready with your answers before going to investors for investment.
It will also help the investors understand your needs and your exact demands, and your chances of success will increase.
2. Decide Your Ask Amount
Generally, it is said that you should raise at least 20% more than you need, but not more than twice as much.
It is a fact that raising more money than you need comes with many disadvantages. The drawbacks of running out of money outweigh the cons of having too much. If you get excessive funding, it can lead to your team having a lot of unnecessary expectations, which will increase your pressure to come up with results.
It may also encourage unnecessary spending, fostering a culture and behaviors that ultimately lead to the company’s failure.
You should do proper research, be sure of how much you need, and be prepared to communicate before attending your investor meeting.
3. Have a Well-maintained Cash Flow
You should have a well-maintained cash flow in your company, even if it is not sufficient to get the interest of investors. Investors want to make sure that the money you are asking for is used to grow your business, not just pay your rent and bills.
Investors believe that their money should be spent to earn more money. They want to be sure that their funds are being used to expand a business or produce more goods to get a return on their investment rather than for rent and energy costs.
When you do not have the proper cash flow, investors will see that, despite your brilliant idea and sound business plan, you desperately need funding. Since they have the opportunity to dominate you financially, they can put you in a difficult situation and try to take advantage of the situation.
Do your homework to assure yourself that you do not become financially stressed because you don’t want to be in this situation. Before looking for investment, make the most of your little money by using innovative ways to grow the company as much as you can without outside support.
4. Do Your Research
Research is a major step before you apply for funding. After you understand your needs and the amount you do, do preliminary research on the kind of investor you are looking for and who those investors are. Always conduct your research because you can be sure that prospective investors will be looking you up on websites, social media, and trade journals.
Before approaching investors for your business fund, learn from and connect with them at investor seminars, conferences, and events. By taking the time to research your possible investors, you can better understand the process of raising money and the kinds of people who are willing to invest. You will be able to find out more about potential partners and their interests.
5. Build a Strategy and a Vision
Everything begins with a goal! You should be ready to go far with potential investors in the future. While most of the points are focused on now, this is more about your company’s future.
Create your company’s strategic goals, which you must have outlined in your business plan, in addition to the corporate vision. For example, will you continue growing and developing the company by yourself? Will you go for additional partners while adding new goods and services? How do you plan to grow shortly?
These are some of the primary factors that influence how you design and introduce your start-up; hence, you should already be thinking about them.
6. Find out Your Burn Burn Rate
After you’ve decided on your future goal and the milestone you wish to reach, you should focus on your burn rate. The burn rate is the total amount of money you’ll need to spend to get there.
The amount of money a business loses each month after deducting income is known as its burn rate. For startups that don’t have any revenue, the money spent each month is the burn rate. The operational runway—the total amount of money that has to be raised—can be ascertained with the aid of the burn rate.
As an entrepreneur, you should not overestimate your ability to complete any task in a given amount of time. Instead, you should set reasonable goals for your business. To make this happy, make a list of the individuals you may reasonably expect to grow within the following 12 to 24 months and think about the number of people you will need to hire to achieve the goal. With this, you can have a clear picture of how to use the funds you raise from investors and avoid unrealistic expectations.
7. Determine Your Value
After you’ve decided how much money to raise, your valuation will be four to five times that amount because most companies are asked to give up 20 to 25 percent of their shares in every investment round. There are numerous variables to consider when you determine your company’s valuation, such as your market and the state of the economy. When deciding on the valuation, the best recommendation is to focus on two factors.
Initially, observe other companies in the market that have completed the same kinds of agreements and check their valuations. Remember that venture capitalists are trying to find the best investment, so price your venture so high that the risk or reward is out of reach.
You can set a target quantity of shares that you are ready to sell. Plan out your dilution for the next several rounds. At this point, decide how much of your company you are willing to part with—15 percent or 25 percent—and build your valuation accordingly.
Sum Up…
Getting funding for your ideas is like a dream come true. But you need to have patience. You should have a properly managed cash flow. Make your plan clear, outlining your vision and goal and the investment amount you are looking for. Besides, be ready to respond to questions from investors. Your foundation should come from your preliminary study and business strategy, but it’s a good idea to go over everything again to make sure you remember everything. Having the answers at your fingertips will show investors your professionalism, depth of expertise, and diligence.
That’s it for now! All the best for your business.