6 Things You Need to Know About Your Investors Before You Ask for Money Do your homework and get to know these six things about the people you're going to be borrowing money from.
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When you've hung out with company founders as much as I have, you've inevitably heard the following line: "I have a big meeting coming up." Because the entrepreneur got the appointment, he's sure the investor has real interest. His growing enthusiasm leads him to think the money is in the bag—only to come back from the "big meeting" empty-handed and deeply disappointed.
For the typical entrepreneur, raising money is an entirely foreign experience. Given that you're dealing with financial professionals who have been doing this for years, your inexperience puts you at an immediate disadvantage. To get up to speed quickly, start by doing your homework to make sure you get in front of the right people.
Investors have a mandate to make money, and typically they have a specific formula to mitigate their risk. That makes it imperative that you understand their priorities. Some things for you to consider include:
What companies have your potential investors worked for? What's their functional expertise? Often they will only invest in what they know. For example, if they spent their career in real estate, they will have a deep understanding of how to analyze the true value of a real estate deal, how to get involved in ways that help the entrepreneur, and how to step in and help turn the ship around if things go sideways. Knowing the background of your potential investors also helps you customize your sales pitch—you want to appeal to their interests and address any possible concerns head-on if you want them to invest.
2. Previous investments
Know the kinds of companies they have invested in before (for example, that real estate investor probably won't invest in software, unless it is a program that helps realtors). If you pitch someone on a consumer internet business and they only invest in energy, it won't matter how good your idea is -- she will likely pass. Also, be aware that if you are dealing with a venture capital or professional investment firm, you could be in the right place but talking to the wrong person. Find out which individual investor inside that firm matches your deal best.
3. Stage of investment
Does your potential investor favor seed or early stage companies, have a minimum-revenue criteria, or have other key requirements before they step into a deal? If you present your business at a stage other than your investor's sweet spot, they probably won't be interested. That is true with both individuals and large firms. Keep in mind that many professional investors raise money from other investors with a mandate to invest in a specific type and stage of company.
4. Size of investment
Ten thousand dollars? A hundred thousand? A million? Be certain that what you're asking for is in line with what they put into individual investments, and explain why you need the amount you are requesting and what you plan to do with it.
5. Expected return
Are they looking to get back two, five or 10 times the amount that they invest? Make sure your expectations and theirs mesh.
6. Investment horizon
When do they expect a return on their capital? What time frame do they have in mind? To get in and out within one, three or five years? Everyone needs to have the same understanding on day one.
How do you find these things out? Again, do your homework. If you can't find an answer to a specific question, just ask. Asking good questions will help you establish yourself as a professional and someone who respects a potential investor's time, which earns you bonus points, as well.
Knowing these things in advance will help you operate with speed and efficiency, saving you valuable time and money. It will help ensure every meeting is with a qualified investor. That way your "big meeting" will be exactly what you expect.
One last thing: believe.
Raising money is no small task. No matter how good you and your product are, it is a time-consuming and labor-intensive process. But when you've done your homework and go into a meeting with the right person, you will know that, at some level, they really want to invest. Their mandate is to find companies just like yours. They are hoping that you are the person who can deliver what they want. In fact, they probably want this meeting more than you do!
So be prepared, practice, and then get in front of the right people -- and execute once you are there.