Early stage funding is vital for companies like tech start-ups as it allows them to access the resources they need to develop their product. But during COVID-19, investment has been harder to come by, with many VCs and angel investors hesitant in the current climate.
Investment funds are needed for pre-IPO companies so that they can get their product to a viable point and go on to secure the greater levels of funding needed to take the product to market and scale it rapidly at a commercial level.
So, how can a company best access the investment opportunities that are available from VCs and angel investors, especially against the current backdrop of economic uncertainty? In a recent webinar hosted by NetSuite, these 10 tips were recommended for IT start-ups or early-stage companies looking to secure first round investment right now.
1. Prioritise Angel Investment
Angel investors may not have as much money to invest at the moment, but they are better prospects for investment at the moment. Not only are they more likely than VCs to make pre-seed investments, they are spending their personal money, so aren’t under the same pressure to get a financial return as VCs.
So, prioritise angel investors in your first approaches. They could be your best prospects right now.
2. Pitch More
Securing investment is like any other sales activity, and the numbers will always count. So, the more you pitch, the better your results will be.
Each company will have its own metrics for the ratio of returns to the number of pitches made. But in the webinar, the interviewee disclosed that their typical guideline of needing 100 pitches to make $100k would likely be doubled – so 200 pitches would be required to secure the same amount of funding.
3. Ask for Recommendations Just One at a Time
It’s good practice to reach out to your extended network as much as possible. Who knows what could come from your second and third level contacts that you don’t yet know. So, asking one of your angel investors to recommend you or send your details to others they know is common.
But you may gain more traction by asking them to send your details to just one other potential investor. In this way, by only asking them to send on to one prospect, this will mentally be an easier thing for them to do. It does take longer to reach as many prospects by doing it this way, but one by one you can acquire the contacts you need.
4. Phase Your Funding
The speaker advised companies to consider phasing the funding they are seeking, by securing it in smaller “tranches” rather than all at once.
So, if you want to secure £900k, this could be done in three phases of £330k, but with each at a different valuation cap. This might look something like this:
£300k at a £2m valuation cap
£300k at a £3m valuation cap
£300k at a £5m valuation cap
The first phase might even be at a valuation that you consider to be lower than your company is worth. This “loss leader” level will be attractive to investors and may entice a big name to invest – after which you can ask them to recommend you to someone else and begin to use the approach in number 3, above.
Then, a few weeks later, you can seek a further tranche of investment, at a higher valuation cap, and so on.
While this method takes longer, and later investors might learn of the increase in the valuation cap, you can justify the changes based on increased competitiveness amongst investors. Anecdotally, it appears to be true that competition increases in this way, based on the fear of missing out on a profitable investment.
5. Explore Using SAFEs
Start-ups can consider using a simple agreement for future equity – or SAFE. Explained in the webinar as “an IOU for equity”, a SAFE gives an investor a right to buy ownership in the company in future fundraising rounds. The stipulation in the agreement might cover how much equity, when and at what cost.
Compared with the other common agreement – a convertible note – the perception of SAFEs is that they are easier and less complicated to use.
6. Show Your Robustness
Certain business models don’t have an inherent fragility in uncertain times. Due to the way the company is operating, it may be robust enough to overcome the challenges of an economic upset.
For example, a small five-person software company that hasn’t yet raised capital could demonstrate its ability to continue to thrive by operating in the same manner. Yet in the same environment, a competitor that has previously relied on significant funding might continue to need that same level of investment to maintain its success.
Being able to demonstrate the robustness of your operating model and business set-up may help convince potential investors that you are a more solid investment that will not fail due to the crisis.
7. Prepare a Teaser Deck and Pitch Assets
Any company looking to secure funding will have its pitch deck ready well ahead of time. But the NetSuite webinar also recommended putting together a teaser deck.
While the full deck would be used in face-to-face meetings, the teaser deck can be sent along with email pitches. The slide titles included in a teaser deck that would be attractive to investors right now would be something like this:
- I’m the CEO of PetDoctor
- Pet ownership is growing – up x% YoY
- The need for vet consultations is booming, but in-person visits are difficult right now
- Click a button, get a consultation with a vet
- We handle 1,000 consultations a day
- Our team consists of experienced vets and ex-GlobalTechCompany designers and engineers
- We’re raising £1m, with £750k already committed
You should also write the email introduction that you will send, and which you can give to others to use on your behalf. Then you should track your approaches in your CRM system.
Finally, the other asset to have prepared right now is a reliable video conferencing system. Some investors will still be hesitant about one-on-one meetings, so make sure your video technology is in place. And don’t rely on the free versions. Depending on your chosen platform, investing in the upgraded levels might mean that meeting time isn’t restricted, or that you can record the meeting.
8. Perfect Your Email Outreach
A strong email pitch will help get your teaser pitch deck opened and increase the likelihood of getting a meeting with an investor.
Nailing this email and can be tricky. A cold approach can work but bear in mind that you will be just one of many and you may not stand out. If you can gain a referral from a mutual contact or can pitch in follow-up to a prior conversation or interaction, then this warmer approach will have more chance of success.
Either way, your email needs to explain a few things: who you are, what market you serve, how your product meets customers’ specific needs, why you are successful now, and how you are succeeding despite COVID-19.
You only have a few moments to gain the attention you need, so use everything you’ve got. If possible, name drop an existing well-known investor to incite that all-important fear of missing out. And you can use copywriting tactics to talk directly about their problems, hopes and fears and how investing in your company will help address those.
Don’t forget to attach your teaser deck. Or even better, subscribe to an online platform that will track opens and downloads for you.
9. Tenacity is Key
You need to be tenacious in your dealings. If you haven’t’ heard back from a potential investor, it shouldn’t mean that you give up with them. Your email may have landed at a bad time, or it may not have resonated right then.
Send a follow-up email with a concise note. In the webinar, the interviewee recounted a time when he secured investment for his client only at the 13th time of asking. Many companies will give up after just a couple of attempts, but you should persist – with different approaches each time. Until you get a definitive ‘no’ in response, being persistent may get you the result you’re after.
10. Warm Up Prospects with an Email Newsletter
Those potential investors who have declined you may well become interested in the future. Don’t automatically write them off. Instead invite them to sign up for your newsletter.
You can keep them warm with regular news of how the company is doing – both in terms of funding and with regard to your product, your success and how you are helping customers.
In this way, you stay top of mind with them and can later invite them to an “insider” round of funding. Your offer may well be better received because you have spent the time over several emails to prove your success and value.
Are you running a start-up technology company? Let us help you by implementing NetSuite. The cloud-based software solution brings together all your key business processes and is designed to be completely scalable and grow as you grow.