As an entrepreneur, you’ll likely need to develop skills to close an investment for your business. You may be the only one raising money in the beginning. Raising capital might mean asking friends or family for $25,000 or pitching an angel network for $100,000.
If you are raising larger sums of money, you may hire an outside party (e.g., broker). They will facilitate the money raising process for you. In either case, you must convince investors of two things. The first is that your business is worth investing in, and the second is that you are worth investing in.
Should you go it alone or seek help?
Getting financed is an area where outside help can be crucial, there are even professionals that do this for a living. That being said, your facilitator’s expertise will only go so far. An investor’s decision to invest will depend on your ability to communicate the business’ value, opportunity the investment offers them, and your capability to effectively put their investment to work. Investors look for differentiated products and business models. They also carefully look at whether the people they entrust their capital have the skills to succeed.
Developing the skills to close an investment is key for every entrepreneur. You need basic skills even if you rely on outside help. The perspectives you develop will increase your knowledge, sophistication, and confidence in the process.
How do you give your company the best chance of closing an investment?
Several different perspectives will help improve your chances of success. If you follow them, you give yourself a better chance to raise money and do so on your own terms.
Remember: you are always onstage.
As I mentioned earlier, entrepreneurs are always onstage. This is particularly true when it comes to investors. Every single interaction, from phone calls to emails, is part of their data. They will use it to evaluate you as a leader. There is no such thing as “off the record” with investors.
When I was in New York City, I had a colleague that had been involved with a cancer charity. His mom died way too young from cancer. Long before becoming an entrepreneur, he was dedicated to raising money for the disease. When he started his company, despite his crazy schedule, he kept up his charity work. He later became a member of the board of a local cancer charity. You would think that these are exactly the character traits you would want in a leader. I found out it wasn’t so obvious. One of his investors later told me during a dinner party, “It’s great he keeps up with the charity but it takes a lot of his time.”
The reality is that everything you do, any time of the day or night, is on stage. It will be scrutinized by investors.
Be clear and concise.
Entrepreneurs know that they need an elevator pitch. This pitch communicates the value of your business in the time it takes to make the trip in an elevator. The need to be clear and concise must permeate everything you do. This applies to every audience, but even more so to investors.
You must be able to clearly and concisely explain the value of the business. You also must be able to concisely answer questions. When asked about a business model, your job is keep the description short and to the point. If an investor wants to know more, they will ask. Keep it simple. Investors look at hundreds of investments and will pass if they don’t quickly grasp the value of the business.
Proactively bring up, acknowledge and address weaknesses.
Every business has gaps and competitive risks. This is especially true of early stage businesses. The way you address these gaps says a lot about you and the business. There are generally two routes entrepreneurs take when it comes to weaknesses.
One approach is to be defensive or downplay the gaps and competitive risks. However, this approach raises two concerns. First, it demonstrates that you are not objective about your business. It shows that your passion and desire cloud your judgment, and ability to make decisions. Second, it strains your credibility as a leader. As a leader, you must embrace the brutal truth and use your talent to overcome the challenges. When you defend the indefensible, you undermine your ability to lead.
The second, and more effective approach, is to be proactive in acknowledging weaknesses, define the obstacles and consequences, and present an approach for addressing them:
Proactively bring up your deficits and strategy for strengthening your weak points before you are asked about them. This will be a pleasant surprise for investors. They are used to leaders minimizing their weaknesses. They will respect leaders who are honest and willing to put their talent on the line against the challenge. If you acknowledge your weaknesses and state a plan for dealing with them, it creates trust and credibility, increasing your chance of closing an investment.
Let the business sell itself.
Don’t hard sell your organization. Let your offering sell itself. How do you do that? Use points of validation by third parties—the market, customers, press, and employees. Investors won’t always believe what you say, but they will believe third party validation.
- Market. Has the market shown interest? For example, “The Innovation Group at IBM featured our solution at their annual Innovation Event.”
- Customers. Highlight customers. “Four of the largest banks in the country are using our solution.”
- Key team members. Talented people joining your team is a point of validation. “Our head of technology used to lead the SAAS technology group at ABC Company.”
- Press. Highlight media coverage that you have received from meaningful publications.
These techniques help you present key evidence of your viability with the validation of independent third parties. This is more powerful and credible than your personal assurance or eff ort to convince potential investors that your solution is “great.” Let third parties sell your business. Then, it sells itself.
Messaging guidelines to build credibility.
These guidelines can help you establish credibility with investors:
- Offer investors the opportunity to talk to third parties. Third party validation is a useful tool, especially if you offer before they ask for it. Encourage investors to talk directly to customers, vendors, and employees and validate your success firsthand. Companies who shy away from offering references are viewed with skepticism. Companies that offer them before they are asked are considered confident and capable of leveraging legitimate with third party proof points.
- Avoid superlatives. Savvy investors aren’t swayed by the use of superlatives to pitch or vet a business. If the business is “the greatest” discovery yet, let them find that out without saying it.
- Avoid discussing deals that aren’t ready. Most savvy investors are skeptical. When you bring up deals that aren’t finalized, investors may think you don’t have much done.
- Don’t attach human characteristics to businesses. When you attach human emotions to businesses, it strains your credibility.
You want investors to invest or pass based on the merit of your business, not how you approach the process.
Never act like you need money.
There will be times when you go into an investor meeting knowing that you are running out of money. Or, you may have a meeting where this investor is your only prospect. When you walk into any meeting or take a call, never act like you need money.
This shows an air of desperation and causes the investor to think, “If this is such a good idea, why are they out of money?” Even if you don’t have a dollar to your name, never act like you need money. You want money to take advantage of the market opportunity.
Do not negotiate from a position of weakness.
Negotiating is about leverage. Unfortunately, in the early stages of a venture, you may have little leverage. You are underfunded, unknown, working on an unproven business model, and subject to criticisms. Creating leverage when you have none requires creativity.
- Communicate a set timetable by which you expect to close an investment.
- Set a plan for a larger investment amount. State that you will take a lesser investment if the valuation does not meet your expectations. This shows belief in your vision and that there are multiple paths to get there. You are setting the criteria you want in an investor. When you do that, make sure you have a plan for the lower investment amount. The first thing they will say is, “Great, can we see the financial model for that plan?”
- Investors should not know that they are your most viable investor prospect. They need to understand if they want your business, they must act to take advantage of it.
Creating leverage when you have little is a real skill. You may be saying to yourself, “It’s a good thing they don’t know how dysfunctional we are.” They know. They have Thanksgiving with their families too.
Make investors put skin in the game.
The typical investment process includes signing a letter of intent when the investor has decided to invest. While the letter of intent sets valuation and the terms of the investment, it does not commit the investor to invest. The investor can pull out without liability.
However, the letter of intent normally includes provisions that limit you in the form of an exclusivity period. This can last anywhere from sixty to 180 days. You are not allowed to negotiate with any other investor during this time, taking away your leverage.
Get the investor put some skin in the game with the following deal structure. Have them make a meaningful portion of their investment, like 20 percent, as a loan to the company on the date of signing the letter of intent. This is done through a valuation stated in the letter of intent. If the investment does not close, the loan stays in place. Then, the investor is the senior creditor of the company.
What does this accomplish?
This accomplishes several things. First, the investor puts some skin in the game. When you have their money, they are more likely to close the full investment and negotiate fairly. Even though you will be subject to an exclusivity provision, you are doing so when they have given you money. Then, they are motivated to move quickly since you have their money. Finally, it provides the investor with security because they are the senior creditor of the company. If the investment does not close, this protects them.
If you have never raised money before, doing so is an art. It requires various messaging approaches and communication that compel an investor to say, “I want to invest in that company and that leader.”
While business fundamentals are usually what dictate whether investors invest, your presentation and demeanor can have an equal or greater impact. You must present your business and team as the right opportunity. Deliver your message with clarity, confidence, and creativity. Following these perspectives does that. It allows you to put your best foot forward even when you feel like you are going backwards.
Closing an investment is never easy. Develop and enhance these skills to secure an investor who is willing and worthy of your business.
Michael Dermer is an entrepreneur, lawyer, speaker, coach, author, and founder of The Lonely Entrepreneur. The Lonely Entrepreneur is a global company that helps entrepreneurs and small business owners turn their passion into success. This one stop shop provides solutions to business and personal issues individuals face as entrepreneurs. Michael’s book is based on his experience of watching the company he built from the ground up almost get destroyed overnight by the 2008 financial crisis. Today, Michael’s mission is to help unlock the potential of entrepreneurs worldwide by turning their passion into success.