Startups, Start Here: Three Tips for Raising Investment Capital for Your Technical Innovation
September 8, 2016
Raising capital from angel investors and venture capital firms can provide the funding needed to transform your innovation into a profitable company. But it doesn’t come easily, and for many it doesn’t come at all.
It can be especially difficult for highly technical founding teams without a business background to communicate in terms that investors understand and that will capture their interest enough to invest in the company. If you’re a founder who is not so comfortable talking about business models, market opportunities, or channel strategies, here are three tips for effective communication with an investor audience:
- Properly frame your investment pitch
I’ve seen many pitches fail to capture the attention of the investor audience because the entrepreneur focused too heavily on the technology and product rather than business model and market opportunity. Of course you want investors to understand what’s special and unique about your innovation but remember, this is not a product pitch. Instead, it’s an opportunity to explain that there’s a big gap in the marketplace and a customer need that must be filled, and you have a profitable plan for doing just that. It doesn’t matter how novel or ingenious your invention is if you don’t have the execution plan in place to connect with and sell to a lucrative market. Investors are investing in you, the entrepreneur, and your business, not just the product.
Again, think about this from the investor’s perspective – they’re in this to make money! And how do they make money? Return on investment. Your company’s growth plan and your (most likely) exit strategy is what they care about. They want to see you know how to scale this company and can make enough profit along the way to have a rewarding exit opportunity in 3-7 years, because that’s when they finally make a return on their investment.
- Traction is king
Traction is one of the most important factors for gauging startup success. It refers to any early commitments you’ve received from the supply- or demand-side of your business such as sales, purchase orders, LOIs (letters of intent), contracts, grant awards, sponsorships, or new team hires – any way that stakeholders show a commitment of time, money, interest, or resources into what you’re building. Traction in your market is especially important to investors who want you to prove that customers will buy your product.
- Have a thoughtful plan for use of funds
One of the first things an investor might want to know is why you are raising money. Do you need to hire more engineers? Do you need a sales and marketing budget? Are you making final adjustments to your product design? Lay out a plan that includes internal (operations-focused) and external (customer-focused) milestones that you’ve set for the company to reach over the next few years, and specific milestones you’ll reach with this infusion of cash you’re seeking.
Not only is it important to show you have a clear plan for using the money, but that each dollar invested will go a long way. Explain how much closer this investment will get you to a market-ready product, first customers, steady revenues, etc. Investors don’t want to see their money as just a “drop in the bucket” but instead that it will add a great deal of value to growing the company. It’s typically a turn-off for many investors to see a company and product that still need millions of dollars and many years of R&D before it will start bringing in money. Ideally you want to convey that you have a customer-ready product and have proven your business model, and now you just need money to replicate and scale what you’re doing. The more you have reduced business risk in the eyes of investors, the better.
For more guidance on raising capital, contact Jack Henkel at the University of Central Florida’s Venture Accelerator Lab. We have a coaching staff to help technology entrepreneurs and researchers identify appropriate funding opportunities and prepare a strong investment pitch.