Chapter 9: Approach a funder (or don’t!) -
Tomorrow Toolkit for Entrepreneurs
Approach a funder (or don’t!) By Christopher Wink
What is the right way to meet, connect and pitch venture capitalists or other investors? Perfect just how you pitch someone for capital. And know when you shouldn't approach at all.

Let Mike Bowman be the one to break it to you. Your company? It’s probably not something a venture capital firm would want to invest in. But that doesn’t mean you shouldn’t build it.

“There are so many other ways to capitalize your business,” said Bowman, the associate director of economic innovation and partnerships at the University of Delaware and longtime president of the Delaware Technology Park. He’s a founder of Leading Edge Ventures, a new $10 million seed-stage investment fund focused on mid-Atlantic tech and medical device companies.

First, make sure you understand professional investors, like venture capitalists and angel funders are only one of your options. Consider a few others:

  • Existing businesses that want to launch a new product might go the traditional bank lending route — though without much track record, you might end up using your house as collateral.
  • There’s the “family, friends and fools” route: a reminder that existing networks can be a source of capital but, without the savvy of professional investors, there are risks.
  • Crowdfunding is a powerful movement tied to products, though it’s largely a marketing platform.
  • Equity crowdfunding, a big variation on the same form, is coming fast thanks to the federal JOBS Act. Community-based crowdfunding initiatives like the forthcoming Delaware Board of Trade and Michigan Funders, along with others across the country are helping small businesses in new ways. 
  • Build on revenue! No conversation on investment is complete without the obvious: If you can build a revenue-generating business first, and can avoid the necessity for immediate scale, you won’t find a sane investor on the planet who would argue with you on that strategy, to maintain ownership and direction. 

Let’s say you do think your company is something a venture capitalist might be interested in. That means you must believe your idea has a reasonable plan for high-speed and high-growth.  “Investors need to see an investment in you as moving the needle in their fund,” said Chris Fralic, a partner with First Round Capital.

There’s great risk in putting $250,000 in seed financing into an untested company, particularly led by an inexperienced founder. So many investors need to see companies that are projecting they could offer more than 10 times in return, with the expectation that some will fail and others will fall short and deliver a three to five times return.

Brock Weatherup has been on both sides of the equation. He founded a Philadelphia ecommerce company Pet360 that was acquired by PetSmart for more than $130 million, and became an angel investor. He places importance on both whether the market is big enough for size and scale required to make a return, as well as whether the product is solving a true pain point. A third consideration is the entrepreneur herself.

“Do I believe in the person who’s trying to do it? Because whatever business plan you’re going to present to me, it’s going to be wrong. And I know it’s going to be wrong and everyone knows it’s going to be wrong. But how are you going to react when you figure out it is wrong?” he said.

One way to temper that risk is to show something that is already working.

“Angels, VCs, banks, grants; all of them are going to want to see traction. All of them are going to want to see activity,” said Heron, of Michigan Funders. The activity within the business defines what mechanism are available to you, he said.

With all that said, if you want to pursue raising outside money, you’ll need to build a network.

Look at how Brooklyn-based video gifting startup raised its $1 million round full of New York tech scene notables: by attending private events and leveraging relationships. Get a warm introduction and offer value in return. “When you’re around a sphere of tech influencers, it’s a great place to start,” said founder Andrew Horn.

“I could pick from a list of 15 businesses that I literally told never to talk to me again because the way that they should raise money is by selling things, is by generating the activity in their business," said Niles Heron of Michigan Funders.

Your Checklist:

  • Do your research: For goodness sake, visit the website of an investor before you reach out. Almost all will list their preferred investment focuses and even the amount of money they most often put into a company. “Most of the time there isn’t a shred of evidence that they’ve even looked at our site,” said Chris Fralic a partner at First Round Capital, who advocated for fewer, more thoughtful outgoing asks. 
  • Get Your Presentation Down: Start with a simple overview slide deck that can succinctly demonstrate your value and why it’s unique. What pain points need fixing now? What customer prospects do you have, based on interviews and existing sales? What is your opportunity to make a large impact and return? Itai Ben-Gal of Detroit smartphone remote control maker iRule presents himself as “customer zero.” By showing that personal stake, your enthusiasm will shine through in a genuine way.
  • Expect rejection: Maybe one in a hundred pitches he hears will get funded, investors say — and due diligence is laborious, and the entrepreneur has to give up considerable control. The process can help a founder develop her idea, and it’s possible you’ll begin relationships that will last for years but understand the process.
  • Demand value: There’s an old phrase in investor circles: don’t chase dumb money. The idea is that an entrepreneur should only pursue investors who can offer value, by way of a network, advice and relationships. Bowman advises to ask: Can these financial partners help you build your company? Money for money’s sake “is not worth the effort,” he said.
  • Don’t bluff envy: “The only way to speed up the process is to get us more excited,” said Gil Beyda, a partner with Genacast Ventures. That means, let them know there’s investor competition — but it better be actual competition. Don’t name drop if there’s nothing behind it.

The point here is that there are clear processes and expectations when dealing with investors, so you need to familiarize yourself. Be honest. Be confident. Be great. If you can make someone else money, you’ll get offered capital, but you need to be sure that you want it.

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