Q: I have an idea but I am unsure when I should approach an investor or what I need to prove/show before seeking funding.
A: Many entrepreneurs want to go directly to the source the moment an idea strikes or at the first sign of growth, but you need to first prove the business to yourself before asking others to believe in it. That doesn’t happen overnight. Start with the smallest team you can to show there is a market for your product and show through research and actual product sales (or pre-sales) that it has some legs. When you can say to yourself, "If I spend $x, I can make $y revenue repeatedly," you are on to something that a VC firm will be interested in seeing. If you can say that and also have some strong growth metrics or it has strong margins associated with those sales, then you'll have a number of firms very interested in funding your business.
A statistic that we are all too familiar with in the world of entrepreneurship is that 9 out of 10 startups will fail. This is the hard truth, so first and foremost prepare yourself for failure as it may happen once or twice or more. Make sure you have a thick skin, an open mind and solid research, or preferably sales results, to take you through your first meeting with potential investors. Following these principles will hopefully improve your chances.
1. Prepare to do the upfront research.
You can't control every metric or outcome at your company before it’s barely off the ground -- and most importantly, you cannot guarantee revenue. But there are some factors you can control -- and you should absolutely use data to track them. You should hone in on these before you go to seek funding. Use online surveying, schedule a focus group or even call a few of your friends and family to test out your target market and your ideal customer. Piece by piece, you can begin to put together the puzzle and build your business plan. Having data in your back pocket is the credibility you need to prove to your future investors that you have an understanding of the past, present and future of your business.
2. One size does not fit all.
While there is definitely a lot of avenues a startup can go down to receive investment, by no means does this showcase that seeking funding is a walk in the park.
You need to know who you are approaching beforehand. Spend time diving into the background and successes of an investment firm’s portfolio companies and understand each investor’s involvement. Finding the right partner requires a sense of trust and transparency that is hard to achieve with just anyone. Before you walk into a meeting with a potential investor, know who you are meeting with, and why you are a strong fit for that given firm and/or specific partner within the firm. Also, tap into your network deeply -- a warm referral from someone who can vouch for you, your team and your product makes a significant difference in getting that initial VC meeting with the right audience.
3. The right place at the right time.
The most important piece of preparation you can do before seeking funding is to know why your product or service will work. The big reason startups fail is being at the wrong place at the wrong time. People miss out because they think they have the right idea, but do not really do the diligence on the size of market and more importantly the intensity of demand (hunger) for THEIR given product within that market. If you don’t do your homework or understand how your product or service will fit in, then don’t waste your time walking into a VC pitch.