by Martijn Lentz
Martijn Lentz is a KVK Entrepreneurial Financing Expert. During Amsterdam Capital Week 2018, he posted a short daily blog on ‘How to raise capital in five days’.
#1: Talk to investors now!
Start searching for investors early on – networking events like Amsterdam Capital Week ioffer a great opportunity. Don’t wait till the moment you actually need the money. Plan ahead and be sure to draw up a sound financial plan, so you will know how much funding to ask for once you find the right investor.
Plan well ahead
On average, it takes a startup 6 to 18 months to find funding. During this time the founder spends 20-40 hours a week solely on raising capital. And that’s just for one round! Searching for investors the moment you need funding is often too late. Finding the right investor is something you have to plan in your strategy. So start talking to investors early on, and build relationships. You have to take your time, and be patient as well.
Being a startup requires a different view on fundraising. It shouldn’t be something you briefly focus on. Finding capital is a crucial part of your daily business routine. To stay on track, make a good financial plan, so that you know what you need.For more information, visit Funding by private investors or banks.
#2: How to talk to investors
A good pitch attracts investors’ interest, but getting your story right requires practice and learning from each comment. Meetings and networking events are a good place to test and tweak your story.
Making contact with investors is a process of trial and error. You can make a good start by following the next steps.
- Learn the basic steps: get a basic understanding about startup funding.
- Know what you want: Funding isn’t your only concern, but it is an important element when doing business. So be sure you know what you want from an investor.
- Show you exist: Make sure you can be found. Build a brand, create a recognisable logo, promote your website…. And more importantly, go out there and present yourself with a good pitch. There are numerous networking events for startups and investors. If you talk to someone and the reaction is: “Hey, I’ve heard that name before”, you are doing well.
- Make a list: You should have a list of potential investors in your company. For Dutch-based startups: you can find active investors checking out the websites of the NVP or BANN, or checking out StartupDelta's Startup Finder. Not all investors match your startup, so be sure to filter for startup phase, investment amount, sector and region.
- Practice what you preach: Get out there and talk to as many people as you can. Use meetings at networking events to test your story, practice your pitch and listen to reactions. Don’t take it personally if an investor reacts with ‘this is not for me’. Most investors have a narrow investment scope, so often there’s not enough coherence between their scope and your proposition.
- The top-10: Once you get the hang of it, you can carefully start contacting your dream investors. Work the top-10 of your list from the bottom to the top. Maybe you have met them before and they remember you.
#3: What investors want to hear
Meeting an investor for the first time? This is your moment to shine! Why should they invest in you? What do they need to hear? Get some tips here.
An investor has invited you for a cup of coffee. That’s a great signal, you’ve passed the first hurdle. But you’re not there yet. The investor uses the first personal meeting to make up his mind about you and your business. It’s the moment to prove what you are worth. Make sure you give enough insights in yourself, your growth strategy and the exit, and you might well find your future investor.
You and your founding team
When you're starting a business venture, the founding team shapes everything from the product to the brand, the voice and culture of your company. Your team is key to success. Explain why you have the power to grow your business. Show how committed and motivated you are to making your business succeed. Have answers ready for tough questions on your personal strengths and weaknesses. Don’t embellish (too much); don't pretend to be a different person from who you are (leave the cape at home).
Explain clearly how you will use the money you’re asking for. Why it is necessary to invest to accelerate the growth. For example: “I am looking for €100,000 to invest in online marketing, sales and distribution, which will double the turnover in the next 2 years”. Your numbers have already been checked out. Therefore seek evidence from recognised sources, and spend time with real customers and industry experts, to quantify the investment opportunity you are offering.
Last but not least is the exit. Equity investors step in for a limited period of time, between 3 to 7 years. So make sure you can explain when and how the investor can cash out on his investment. After all, to make a profit he needs to sell his shares in your company at a higher value. In the ideal situation an investor can reap the benefits of his investment when the company is sold to the market leader or via IPO. In those cases, there is a high premium that will lead to great return on investment (ROI).
So here you have it. Make sure you give enough insights in yourself, your growth strategy and the exit, and you might well find your future investor.
#4: The right mix of financing instruments
Funding your startup with equity or loans? You don’t have to choose one. KVK breaks down the perfect mix of debt & equity funding. While there are no hard and fast rules, if you are setting up your business, it makes sense to strongly consider equity financing in order to get the business off the ground. Investors don't require fast repayment, and most startups don't turn a profit for a significant time period. If you are getting a steady revenue stream, then loans make a lot more sense. In addition to this the ‘use’ of the money is important for the route debt or equity. All in all it’s the right mix that fuels your startups’ growth.
The mix of equity and debt
As a founder it’s important to understand the difference between debt and equity financing, by angel investors or venture capitalists (VCs). No hard or fast rules apply.
Equity financing involves giving a portion of the shares of your company to investors in exchange for money. Investors will provide equity financing when they are convinced of the upside potential of your company in the future. The portion of the shares that will be sold depends on the valuation of your company at the time of the financing.
When a company borrows money from third parties to be paid back it is known as debt financing. A startup typically takes up a loan to finance working capital. Lenders will provide credit when you can explain how you can ensure back payment. A company takes on debt financing because it’s often cheaper and less risky than financing the whole growth with equity. Too much debt however is also risky and thus, founders have to decide the debt to equity ratio which they are comfortable with.
Although many founders regard giving third parties an interest in their business as losing control, this doesn't have to be the case. If you choose the right investors, they can be extremely helpful in terms of establishing business connections and offering valuable advice and assistance. Also committed investors are instrumental in attracting more investors if necessary.
- Unlike equity, debt must at some point be repaid.
- The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry.
- Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options.
- The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in many cases required to personally guarantee repayment of the loan.
The biggest advantage for choosing loans is that you maintain control over your business. The only obligation you owe to your lender is to repay the loan as agreed upon. An advantage that can be very helpful is that paying off the interest on the loan can be deducted as a business expense for tax purposes.
- Debt does not dilute your ownership in the company.
- A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business.
- Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company.
#5: Why startups and investors fail to connect
Finding an investor, is like getting into a relationship. It’s all about the right match. What are the 3 biggest reasons startups and investors don’t connect? Founders search for the right investor and investors are always on the lookout for that one big fish. A matter of 1+1=2, wouldn’t you say? To connect with investors, you need to know what makes them tick. You have to speak their language. Also, you need to understand that there are active and passive investors, and that every investor has their own investment scope.
What?!? The jargon of investors
A different language is difficult to understand, and that doesn’t only apply to languages and dialects. Startups and investors have a completely different understanding of the world. You want to succeed in life with your business, investors want return on investment (ROI). Not to mention other investment jargon, such as exit strategy, due diligence, multiples, escrow and IPOs. As a startup it makes a lot of sense to learn the basics of that jargon, to know what they are talking about, and to make a personal connection. So visit an investors meeting, take an online crash course or place yourself in the position of your future investor.
Active and passive investors
Investors come in different shapes and sizes: from very passive to very active. Whilst passive investors only commit capital and hardly get involved in the company, active investors prefer to sit in the driver’s seat. As a founder it can be hard to deal with someone who wants to be involved in day-to-day operations and have a say in decisions. So it’s essential to think about what you prefer, before you make a deal.
Investment scope and sector
Is your startup not in the same sector as your investor, then you are one point behind. Most investors have been or still are business owners themselves. They have expertise, experience and connections in a certain sector and want to invest in a business that closely resembles what they know to reap their strengths. Are you doing something different, than your proposal might be not for them. That does not have to be a dead end street. Many investors are connected. So if an investor likes your vision, he might bring you into contact with other investors.