Avoiding the WRONG type of investor for your company

by birtanpublished on September 4, 2020

This video was brought to you by slidebean founders edition get help from our team in your pitch take your financial models and your fundraising sign up with the link in the description one of the most common problems we see

With pitch decks is companies with a business model that is not venture fundable aspiring to raise venture capital we made a video on the difference between what i call a small business and what i call a tech

Startup and how traditional businesses don't have access to the same capital that startups do however we didn't provide a solution back then mostly because i didn't have one or at least one that was

Clear enough and i still don't have one today and that's why we brought steve barsh from dream it to pitch in steve was no kidding the first vc i ever met in 2012 i joined the dreamit

Accelerator with a previous company and steve gave the class uh the opening remarks it was the first of many steps to beginning to understand how fundraising in this startup world worked

That first company failed but steve and i have remained close and now he hosts a fantastic youtube channel for the dream at accelerator and without further ado here he is

thanks kaya for having me most startups are obsessively focused on finding investors to back their idea someone to take a chance on them someone who wants to get behind

The next big thing but often founders are perplexed on how to find those investors why it's taking so long and how to speed up the process let's dive in i hope you liked this

Video and if you do please like and subscribe to both the sly bean and dream adventures youtube channels no matter what kind of startup you are the first thing i want you to think about is

Do you really need outside investors in the first place it seems most startups and founders feel that getting investment is a milestone they have to achieve to get started they read the headlines about

Deals getting done this company just raised three million dollars this other company just raised 10 million dollars and they get dollar signs in their eyes that success

Is always raising outside money i want you to try to back away from that concept for now the first thing i want you to really think hard about and push yourself on is do you really need to raise at all

I don't see enough startups trying to start by bootstrapping it's a great way to go but you'll have to push yourself and ignore the x just raise y dollar headlines instead of burning up

So much of your time trying to convince investors to part with their cash how about you spend more time trying to convince customers to part with their cash

I know you may be saying but i need money to build the product yep but i want you to think outside the box here i want you to burn up your intellectual capital before taking outside capital

Raising outside capital is extremely time consuming and often yields poor results how can you do things differently can you find co-founders who you can live with or everyone works remotely

From home and you can all take just a little bit of salary and within a few months have a basic working product that you can sell can you find a customer who will pre-order or pre-pay for the

Product if you're a b2c company maybe you could start by using kickstarter or indiegogo to raise initial funds by pre-selling your product what if you're a b2b company

Maybe if you could find just three b2b customers and cut them a sweetheart deal that's going to be your startup capital also called revenue let me give you a bootstrap example from a baker i met this week who started a

Company hawk and sparrow in midway utah near park city he makes the most amazing bread instead of taking the approach that i need money to rent a location for my

Bakery i need this really expensive oven andrew started his company from his garage bought an oven and started by selling wholesale to restaurants and also to consumers with a bread

Subscription service in the local park city area he's building his business with an amazing product now that he's up and running and has actual product if he does want to raise

He can give investors a taste of the product talk about his vision of how why he wants to expand it's going to be so much easier for him to raise money as many of the base

Assumptions are gone he has a great product that people love and he can find customers at a reasonable cost of customer acquisition his only real concern now could be he doesn't have enough capital to keep

Up with demand hire more bakers and expand so ignore the headlines and try everything possible to bootstrap now let's say the time comes and you do want to raise outside funds maybe it's a friends and family round

Maybe it's your seed or your series a round the first thing i want you to think about is how much are you going to raise and why that amount of money

Think carefully about how that money is going to get you to cash flow breakeven or your next set of fundable milestones do not think about the money in terms of how many months of time it's going to buy you

We see so many startups that when you ask how much you raising or why are you raising x millions of dollars they respond with well because that buys me 18 months time is not a fundable milestone

Investors don't care how much time it buys you they want to fund things like rapid learning goals being met and revenue targets don't forget to add at least three months of cash to how much you're

Raising so you can hit those fundable milestones and leave yourself enough time to raise your next round before you run out of cash now that you know how much you're

Raising you can focus your investor search so it's as productive as possible the easiest place to start is to ask yourself what investors place bets in your sector usually investors will

Openly state their thesis about a particular sector for example some investors like space startups now that you no longer need nasa to get a vehicle into low earth orbit or create or launch

Satellites with the advent of cubesats a space investor's thesis is that the industry will be disrupted and new revenue streams will emerge rapidly from startups that are taking advantage of new

Technological breakthroughs bringing it back down to earth there's some investors that feel consumers want everything on a subscription basis so those investors feel that subscription-based direct-to-consumer

Startups can beat out decades-old billion-dollar brands that have no direct relationship with their customers whether you're selling space or soap or all points in between make sure to

Start by identifying the investors that invest in your sector the next thing i want you to think about what investors typically invest at your stage you want to find investors who align with your level of risk

There's a huge difference in investors who will do an angel versus a seed versus series a or growth capital round and it's all based on what stage your company is at and what perceived level of risk they're taking

While thinking about stage you should also target investors based on the check size they typically write and by the way for the record they don't actually write checks anymore it's nearly all done by wire transfer but you know

We still call it check size anyway let's say you're looking to raise four hundred thousand dollars to get your new franchise off the ground don't approach investors who typically write checks for two to three million

Dollars it just doesn't align for them how do you know how much they typically invest research online or shoot them a quick note and ask next think about geography many

Investors want to invest in their own backyard a company or startup they can go and see an entrepreneur who they can meet with every few months to see how things are going or be there in person for a board

Meeting there are some investors who will focus on broad geographies like south america the us canada europe or asia but most investors tend to invest more locally so if you're starting your new e-commerce

Company in poland or turkey reaching out to investors in the us will most likely be a waste of your time when it comes to investors think local start local and expand from there

Next add your targeting criteria if you're looking for an investor that does debt or equity rounds basically how do they like to invest some investors will basically loan you money as debt in many early stage tech

Companies that will be via a convertible note or a safe agreement there are other investors who never want to get into debt rounds and instead want to buy priced equity stock

In your company make sure you understand what type of funding you're looking for and narrow your search to investors that align with it we talked earlier about looking at investors that are active

In your vertical one way to quickly eliminate investors is when they have an investment in a direct competitor you may think it's a good signal hey look they invested in a company just

Like us so they're interested in our space but it's actually just the opposite usually investors will only place one bet in a company solving a specific problem for a specific target customer

So if you see an investment in a direct competitor don't target that investor now i want to point out a special investor type that's important for really early stage startups no matter what type of company you are

Angel investors angels will invest for a multitude of reasons while they are almost always looking for great investment opportunities there are often other reasons that they'll do deals they're typically much

Further along in their career successful and are looking to invest in a space they already know very well they often want to enable an opportunity for another entrepreneur to be successful in that space

Maybe they made their money in the food business so they want to fund the next great restaurant or breakthrough food concept or bakery in utah maybe they made their money in real estate so they want to

Help startups in an area they know really well and they can take personal advantage of a product or service that solves a problem that they have been intimately familiar with

The point is you can think about connecting with angels on more than one level think about how you can identify angels that have been successful in your sector search them out online pitch them on how

You think what you are doing is well aligned with successes they've had and further ask them for their advice on the two or three most critical things you should be focusing on and you know

There's a funny saying we have about that if you ask for advice you tend to get money and if you ask for money you tend to get advice so ask for a lot of advice oh and let me share some thoughts on best tools

And sites you should be using for all of this and that's going to be google linkedin crunchbase and angellist and a final thought jeff bezos had 60 meetings to raise his

First 1 million dollars in outside capital for amazon.com giving up 20 percent early investors he ended up getting investment from 22 people who put in an average of 50 000 each

So if you think wow this is so hard so much rejection i can't believe how many people i've had to meet with be like bezos and stick with it no one ever said fundraising or startups were easy

But man is it a ton of fun i hope you liked this video and if you did please like and subscribe to both the sly bean and dream adventures youtube channels thanks for watching

You

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