OK, this week we’re getting stuck into another big topic… How to find new investors, how to talk with existing investors and what you might want to do before even starting those conversations.
This topic might be more subjective than others, so this is mostly how I see things. If you have a different opinion, feel free to share it on socials or DM me.
Reaching new investors can be tricky, especially if this is the first time you are raising capital. A lot of people start with friends and family, but that network runs out pretty quickly, so you will soon have to engage with angels, family offices and VCs to find more capital.
Angel investors are early stage investors that invest their own capital in startups. They are often former founders or high net worth individuals / professionals (HNWs) that are looking for alternatives to investing in listed companies. Angel investors vary widely in their level of sophistication when it comes to investing in startups. Some are just starting out and some have been doing it for many years (and have some very big successes).
While there are angel investor groups (eg Sydney Angels and Melbourne Angels) or syndicate groups (eg Aussie Angels) that pool together HNWs, many of the best angels operate on their own. This obviously makes it harder to find the best angels, so you’ll often have to reach out to them directly (see below on the best ways to contact investors).
Family offices (FOs) are HNWs (either individuals or families) that have been very successful and now have enough wealth to manage it through a stand alone entity / organisation. Similar to angels, FOs can range in size, sophistication and scale. Some FOs might manage $1B+ portfolios, some might manage $20M+ portfolios. Also, FOs will have different mandates for investment that largely mirror the preferences and experience of the families behind them. Some will be very conservative (mostly property), some will be very adventurous (large allocations to VC and alternative assets). It all depends on the people running the FO.
FOs run by former founders or family members tend to have more freedom in what they can invest in. FOs run by professional managers tend to have a more hemmed in mandate. In my experience, professional managers tend to be more conservative and focused on capital preservation than family members. This might be due to professional managers often coming from traditional financial or professional institutions rather than growing up in an entrepreneurial environment. They can also be used as gatekeepers to stop more speculative investments that family members might want to make. Like many things, there’s no right or wrong way to run a FO, just your way.
These are just my observations and FOs come in many different forms, so you need to do your research on each FO you want to reach out to or pitch. There’s no point trying to get a meeting with a FO that only invests in property and public equities.
VC funds are specifically set up to fund startups, but they also come in many different shapes and sizes and have certain preferences. In Australia there are very few industry / vertical specific VC funds (the market is too small). Australian VC funds tend to be more stage focused. For example, Archangel invests in pre-seed and seed stage companies, while other funds might only invest at series A (or later).
There is also a growing list of corporate VC funds (either on or off balance sheet). These VCs tend to be more sector specific given that they have spun out of large corporations.
Once again, the critical task is to do your research on each fund (and even the relevant partner) to see whether your startup fits into their mandate or expertise. While some VCs may be able to refer you on to someone with a mandate that meets your startup, VCs receive many inbound inquiries and they might not have the time or inclination.
The keys to getting in contact with VCs are to be realistic, relevant and come through reliable channels. Realistic means that you have to be in the realms of current market conditions (ie don’t ask for $5M on a $50M valuation with $10K revenue). Relevant means that you are working in a space where they operate (stage or industry) and have a business that is doing something new (ie sprinkling AI on top of Web2 is not new). Reliable channels means (usually) people they trust, such as respected angels and former or current portfolio founders, although some are happy to receive emails or DMs (check their social profile).
If you don’t have any people connected to VCs in your network, then you’ll need to do some networking or find another way (eg accelerators). This might seem like an arbitrary test, but getting in touch with a VC is much easier than building a big business (the ambition of most founders), so just treat it as another task to be completed.
Reaching out to new investors
This is a well covered topic, but I think it needs repeating because founders still seem to ignore some basic principles. Your best (not only) path to having a meaningful conversation with an investor is through someone they know (ie a warm introduction rather than cold outreach). Yes, some investors (usually VCs) may post their email on their social profile or invite DMs, but many don’t (rightly or wrongly). Additionally, a random LinkedIn connection request is also unlikely to get you far - they don’t know you and it doesn’t tell them much about you or your startup. If you do your homework and write a personalised message to someone on LinkedIn, that might work, but generic cold outreach and simple connection requests have a low chance of success.
Below are some things that I have found to be successful and less successful for connecting with new investors.
Things that usually work:
- Personal / business relationship
- Warm intro email via someone connected to you and them
- Personal conversation at an event
Things that sometimes work, but usually don’t work:
- Personalised cold email with relevant content
- Personalised direct message (LinkedIn, Twitter and other platforms) with relevant content
Things that usually never work:
- Generic cold email
- Hostile email after someone says no (yes, they happen)
- Generic LinkedIn message
- Comment on tweet
- LinkedIn connection request
Existing investors are the secret weapon to your next fundraise, but what you do between the last and next fundraise will determine how helpful they can be.
If you keep investors regularly updated on progress, they are much more likely to be engaged and helpful and / or re-invest with the next fundraise. Providing regular investor updates shows discipline and builds a longer term narrative that gives investors confidence in the founders and business. It should never be a surprise to your existing investors that you are about to do a new fundraising because it should have been flagged in your previous updates. Another reason for regular investor updates is that it provides any easy item to forward to new investors, either by you or existing investors.
Apart from notifying investors that you are planning to do a new fundraise, you might want to get some (eg influential angels and VCs) to help you with the process. Strategy sessions, reviewing pitch decks and discussing realistic terms are some of the ways that existing investors can help you prepare for the next fundraising. They also have significant networks and access to other (usually later) VCs.
If you are making good progress and you engage with them frequently, the decision to re-invest in the next round is usually a no brainer.
Some tips on preparing for your fundraise
Do your homework: put together a CRM and qualify which investors might align with your startup (eg stage, vertical or past experience). Know whether they have invested in a competitor, as they are very unlikely to invest in your startup.
Work your network to find good connectors: go through your network to see who is connected to investors. If you don’t have common connections, start looking through the next circle connections (and so on).
Set realistic expectations: often we see founders who have unrealistic expectations of their startup’s value and / or their growth projections. This is often an early red flag and will hurt your ability to have a meaningful conversation with investors and show your true potential. If you want to get some perspective on what is realistic, talk to other founders that have gone through the process or existing investors (if you have them).
Prepare your pitch deck: this one is pretty obvious, but you’d be surprised how many people don’t have their deck ready or up to date when you speak with them. Make sure your deck (v1) is at least ready before you start any investor conversations. Also, update it as you go along in the process as you learn more about what investors want or are focused on with your business. Getting out of date graphs is another sign that the founders might not be prepared or taking it seriously.
Put together a folder of simple commercial DD items: this doesn’t have to be complicated (and we’ll get into more detail next week), but you need to put together some basic information to give investors if they have initial follow up questions. Such items might include financial statements, collated investor updates, competitor analysis and more detailed decks that provide more data on the market and / or your product.
Next week I’m going to draft in Ben Armstrong to help us look at the wonderful world of commercial due diligence. We’ll look at what investors commonly want to see when you’ve gone past the first conversations and are starting to deep dive on your business before giving you a term sheet.